China likely to maintain rapid pace of growth over the coming months, says Scotiabank

The Chinese economy is expected to maintain a rapid pace of economic growth over the coming quarters, according to a report released by the Scotiabank said Thursday. However, its economic transition away from external demand-driven growth continues and remains a key source of global uncertainties.

The Chinese government has recently shifted its focus on implementing supply-side reforms to reduce excess industrial capacity. Also, it will simultaneously intervene to maintain a stable economic environment, mitigating risks of disruptions caused by market volatilities. Further, China’s real GDP grew by 6.7 percent y/y in the second quarter of 2016, in line with the pace recorded in the January-March period.

"We expect output expansion to slow in the second half of the year, averaging 6.5 percent in 2016 and 6.1 percent in 201. We anticipate the policy rates to be reduced by 25 bps by year-end. China’s inflation remains manageable, allowing for further stimulus ," Scotiabank commented in its report.

Further, cautious monetary easing will likely be implemented over the coming months, particularly in the form of targeted policy measures. The People’s Bank of China (PBoC)has loosened policy by reducing banks’ reserve requirement ratio five times since February 2015 to 17 percent, with the most recent cut on March 1, 2016, in order to support money supply and credit growth as well as maintain liquidity in the banking system.

In addition to monetary easing, expansion in fiscal stimulus also seems to be implemented over the course of 2016. China’s gross public debt will remain slightly below 50 percent of GDP in 2016-17, according to reports released by the International Monetary Fund. The country’s current account surplus has decreased substantially over the past decade, averaging 2½ percent of GDP in 2016-17.

Meanwhile, sentiments toward China is expected to remain volatile over the coming months, impacted by corporate debt overhang, developments in the housing market, concerns regarding economic growth and industrial over-capacity, structural reform progress, and authorities’ intervention. The 5- year credit default swap is currently trading at 111 basis points (bps), slightly below the six month average of 124 bps, the report concluded.