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In the first quarter, the Chinese economy grew 6.7% y/y, a slight slowdown from Q4 2015’s 6.8% in spite of the easing of policy and rally in the property market. On a sequential basis, the economy grew 1.1%, a deceleration from previous quarter’s 1.5%. This weakness is not expected to be for a short period of time. The PBoC might loosen policy more warily amidst the recent rise in CPI. Meanwhile, housing sales might decelerate in the quarters to come as several major cities in China have tightened their property policy since March, said Commerzbank in a research report.
“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”, added Commerzbank.
Meanwhile, the Chinese central bank is likely to lower policy rates in the second quarter by 25bps. Moreover, it is expected to lower the reserve requirement ratio by 150bps before the end of 2016 to offset capital outflows and sustain liquidity conditions.
China’s fiscal policy is expected to be proactive; however, there is a very small chance of a fiscal stimulus on a major scale, noted Commerzbank. Fiscal stimulus is expected to worsen the problem of over-capacity and have restricted effect on increasing underlying demand. With the solid outflows of capital, the CNY continues to be under high pressure to weaken. However, the central bank is expected to carry out market intervention in order to avert CNY from declining sharply because of worries regarding rising external debts and market instability.
China has introduced a “CNY Exchange Rate Index (CERI)” that tracks the yuan against a basket of 13 major currencies globally. This emphasizes the PBoC’s plans to permit the CNY to depreciate against the US dollar.
“Our base case is for USD-CNY to reach 6.75 by end- 2016”, said Commerzbank.
