Chinese Economy to Slow Further in 2016 and 2017, USD/CNY Likely to Reach 6.75 by End -2016

Chinese Economy to Slow Further in 2016 and 2017, USD/CNY Likely to Reach 6.75 by End -2016

In the first quarter of 2016, China’s economic growth slowed to 6.7% y/y from Q4 2015’s 6.8% in spite of the rally in property market and a proactive policy easing. China’s economic growth rate dropped to 1.1% on a quarterly basis in Q1 2016 from 1.5% in Q4 2015.

The weakness in the economic growth is not expected to be a short term phenomenon, according to Commerzbank. Amidst the recent acceleration in CPI inflation, the PBoC might ease policy more cautiously. Meanwhile, housing sales in China are also likely to drop in the following quarters as most of the major cities in the country have tightened their property policy. “We maintain our below consensus forecast of 6.3% for this year.

For 2017, we expect a growth to slow to 5.8% in 2017 due to the property over-supply and debt overhang”, noted Commerzbank. Meanwhile, the central bank is still likely to lower policy rates by 25bps in the second quarter due to the uncertain outlook of the economic growth. Moreover, PBoC is also expected to lower the reserve requirement ratio by 15bps before the end of 2016 to maintain liquidity conditions and offset outflows of capital, added Commerzbank.

Meanwhile, fiscal policy is unlikely to provide fiscal stimulus on a major scale. However, fiscal stimulus is expected to worsen the issue of over-capacity. With the large outflows of capital, the CNY is expected to be in great pressure to decline, said Commerzbank. However, the central bank is expected to carry out market intervention to avert CNY from declining sharply. “Our base case is for USD/CNY to reach 6.75 by end- 2016”, noted Commerzbank.

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