ICAEW Economic Insight: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.
Following a modest slowdown in Q3, overall growth in industry edged up in October, reflecting stronger exports and infrastructure investment as well as industrial restocking. But consumption growth weakened further amid subdued confidence, while credit growth continued to disappoint.
At 10.6% in October, overall credit growth has fallen by 2.6 ppts since January. This is in spite of an easing of financial and monetary policy, including boosting liquidity, some easing of financial regulation and increasing infrastructure investment. Several factors have weighed on credit growth – the new asset management rules are still constraining credit in shadow banking; banks remain cautious and risk averse; credit demand from the corporate sector remains weak; and while policymakers have called for more infrastructure investment, they have not yet significantly eased rules on debt of local government financing vehicles. Thus, it takes time for the easing to feed through.
Goods exports growth accelerated in recent months, defying expectations of a slowdown amid higher US tariffs and softer global trade momentum. But the trade spat with the US will be a key headwind for China in 2019. It will affect exports as well as investment in manufacturing and confidence more broadly. Following the earlier escalation of bilateral tariffs, there have been some signs of improved communication. However, given the long list of US demands and wide gap in positions, we think that a significant de-escalation in tensions is unlikely in the short term.
Moreover, the prospects for domestic organic growth are subdued. We expect real estate activity to cool further as sentiment softens and support from the scheme to renovate shanty towns declines. In this setting, consumption should be subdued as well.
But policy easing should moderate the slowdown. Following the above mentioned steps, we expect the government to take further measures to support the economy as downward pressure rises, possibly including: more reserve requirement ratio cuts; efforts to boost lending to private companies; additional support for infrastructure; and further cuts in taxes and social security contributions.
We expect policy easing to remain relatively modest compared to earlier episodes, as well as depend on incoming data, and thus occur incrementally. Indeed, we see overall credit growth rising by only around 1 percentage point to roughly 11.6% by end-2019, after a significant deceleration in 2018.
Nonetheless, combined with the fiscal steps and measures to shore up confidence in the private sector and markets, we expect the impact of the policy support to become large enough to help economic growth bottom out around Q2 2019. In all, we expect China to have 6% GDP growth in 2019, after 6.5% in 2018, less than the consensus. Meanwhile, the macro picture on policy easing supporting domestic demand hides sectoral shifts, with infrastructure spending picking up, while investment in manufacturing will be under pressure from the trade tensions.
As China continues to grow faster than its trading partners, its imports are likely to continue to outpace exports, driving down the current account surplus. Indeed, we expect the current account surplus to decline sharply in 2018 and be close to zero in 2019 amid the impact of the trade conflict with the US and Beijing’s lower trade tariffs. Also, a current account deficit cannot be ruled out, especially if oil prices were to rise again.
A decline in the current account surplus to around balance in 2019 is technically not a watershed moment in the FX market and for the balance of payments. However, it will inevitably affect views on financial stability and the CNY, as well as the policy approach towards capital account opening. Regarding the latter, we expect the less solid situation with the balance of payment as a result of the shrinking current account surplus to lead policymakers to keep the stance on financial outflows as tight as they consider necessary to prevent FX reserves from declining.
The CNY is likely to remain under pressure in early 2019 due to rising trade headwinds, a falling current account surplus and higher US interest rates (Chart 4). Concerned that currency weakness leads to larger financial outflows, China's authorities have started to take steps to dampen these pressures, including the maintenance of a relatively tight policy stance towards financial outflows and outright FX intervention. Our baseline scenario sees the CNY remaining on the strong side of 7/$1. But we think that the appetite to shore up the currency has limits. If pressures were to get severe, we expect the authorities to accept the CNY weakening beyond 7/$1.
Subsequently, the pressure on the CNY should ease in around Q2 as China’s growth bottoms out amid slowing US growth. We now see the CNY/USD rate ending 2018 at 6.93 and strengthening somewhat from Q2 2019 to end 2019 at 6.72.
In Hong Kong, GDP growth slowed further to 2.9% year-on-year in Q3 from 3.5% in Q2. However, the moderating headline growth masked the still-resilient consumption and export momentum, and the rebound in fixed investment and inventories. The much stronger-than-expected imports was the main drag on growth. That said, we expect the elevated US-China trade tensions and slowing Chinese economy to weigh on Hong Kong’s external outlook in upcoming quarters. Domestically, we expect the housing market downturn will weigh on private consumption in the near term. Given the expectation of another US rate hike in December and three more next year, we think that inter-bank interest rates will continue to rise despite short-term volatilities. This should add pressure on banks to further raise prime lending rates and mortgage rates, intensifying the downward pressure on the housing market and slowing credit growth. We now look for a GDP growth of 3.3% in 2018 and 2.1% for next year.
Macau’s economy expanded 7.6% y/y in H1 2018, underpinned by a strong export performance and improved household consumption. Growth seems to have remained solid in Q3 but momentum is easing. Growth of gaming revenues slowed sharply in September-October to 2.7% y/y from 18.9% in H1. We expect it to continue to be challenged in the coming months by deteriorating market sentiment amid a cooling Chinese economy and the ongoing trade conflict, as well as unfavourable base effects. Domestic demand, particularly investment, remains weak, but private consumption is firming and should continue to benefit from the favourable conditions for jobs and incomes, and a buoyant property market. Given the stronger-than-expected H1 out turn, we now forecast GDP growth to average 5.9% this year, before slowing to 3.8% in 2019.
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