Economic Analysis - Growth Scenarios: Risks Skewed To The Upside - NOV 2017

BMI View: O ur core view remains for a gradual growth slowdown over the coming quarters as fiscal support wanes, the property market cools, and credit conditions continue to tighten. That said, the ability to create wealth in spite of the government's still-tight grip on the economy reflects the hitherto resilience of China's private sector . In this article we look at a number of scenarios related to private sector productivity and economic reform prospects that could see growth over or undershoot our 5.7% long-term growth forecast for China.

After anticipating the slowdown in the Chinese economy since the post-Global Financial Crisis rebound, we have been surprised by its resilience over recent years. Our view remains that China's growth slowdown will resume over the coming quarters as fiscal spending and credit growth wind down. The continued misallocation of credit due to the close links between state-owned enterprises (SOEs), local governments, and the banking system, which has seen total debt levels continue to surge to new all-time highs, is likely to take its toll on growth over the medium term, regardless of whether the government can manage to undertake reforms to break this system of resource misallocation. A decline in property prices could potentially reveal the extent to which the economy has become reliant on this sector, ushering in a resumption of the growth slowdown.

However, the resilience of China's private sector and its ability to create wealth in spite of the government's still-tight grip on the economy should not be underestimated. The private sector continues to grow as a share of GDP as the so-called old economy of resource-intense heavy industry gives way to the new economy that is dominated by consumer services. Gradual economic liberalisation efforts and in particular the anti-corruption drive have helped to facilitate this.

Will The Recovery Last?
China - Nominal And Real GDP Growth, %
Source: Wind, NBS, BMI

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