China: No Support for Growth by Adding Leverage - Nomura
Research Team at Nomura, notes that according to yesterday’s official
People’s Daily, an “authoritative” person who was not identified
indicated that China should not support growth by adding leverage.
“High leverage will lead to high risk; if not well controlled, it will lead to systemic financial crisis and negative growth”. Considering China’s severe structural problems, this “authoritative” person believes that “China’s economic growth trend in future should be ‘L-shaped’, rather than ‘U-shaped’, not to mention ‘V-shaped’”, which suggests that growth will trend lower. This individual believes China should avoid using strong stimulus to raise investment growth in the short term, as it would create larger problems later. For now, the most important thing, in this person’s view, is to push forward supply-side reforms (i.e., cutting over-capacity, reducing property inventory etc.) and actively but steadily reduce leverage.
We note that the People’s Daily has in the past cited “an authoritative person” when discussing top-level policy issues. Two examples within the last year include an article on 25 May 2015 in which five questions related to the economy were discussed, and on 14 January 2016, when seven questions on supply-side reforms were addressed. While the anonymity has been protected, the views expressed in these articles did have a large impact in China.
Overall, the report suggests to us that future policy easing may be more cautious and that the government may try to hasten the pace of reforms, thus reinforcing our view that the debt-fuelled rebound in investment growth will be short-lived. We maintain our view that investment growth will likely slow later this year and reiterate our forecast for GDP growth to slow to 6.2% in 2016 and 5.8% in 2017.”