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21 Dec 2015
Looning into China's economy - Nomura
FXStreet (Barcelona) - Analysts at Nomura explained that the Central Economic Working Conference (CEWC) concluded today. Their comments on the press release issued via the official Xinhua news agency are as follows:
Key Quotes:
"The CEWC stressed that the economy should run at a sustainable and healthy pace in 2016. We continue to expect the growth target to be set around 6.5-7.0% (most likely tilted to the lower bound) for 2016."
"However, we do envisage this target being missed, because of downside pressures from structural factors such as property oversupply, overcapacity and high leveraging. 2. Policy will be eased further in 2016 to stabilise growth. The CEWC reiterated a prudent money policy stance, but this time stressed higher flexibility, suggesting a more flexible floating exchange rate regime (RMB deprecation at a gradual pace) and interest rate liberalisation, in our view."
"This also increases the conviction of our forecast of four 50bp reserve requirement ratios cuts and two 25bp interest rate cuts in 2016. The conference also decided that fiscal policy should be more proactive with a larger fiscal deficit. We continue to expect the fiscal deficit to widen to 3.0% of GDP in 2016 from an estimated 2.8% in 2015, and an aggressive quasi-fiscal stimulus via policy banks.
Moreover, the government is to roll out measures to lower the corporate burden, such as corporate tax cuts. 3. Real estate destocking by encouraging property sales to migrant workers through cutting house prices, and possibly easier mortgage conditions."
"To resolve severe property oversupply, the government aims to boost demand, especially encouraging migrant workers to buy houses in the cities. Easier access to mortgage loans for homebuyers may be one option for stimulating demand, but we think the impact will be limited, because of rural households’ weak affordability (in 2014, disposable income per capita for rural households was RMB10489, less than 40% of RMB28844 for urban households).
Lower house prices may be another way to boost demand. In the press release, the government has encouraged property developers to cut prices to increase destocking. Moreover, it said that “obsolete restrictive measures should be revoked”. Could this indicate the removal of house purchase restrictions on second or third houses in the cities? If so, it may boost property sales in larger cities, whose properties are viewed more as investments, but is unlikely to provide much help to the smaller cities."
"Overall, we think these measures are unlikely to drive up property investment as oversupply is concentrated more in Tier-3 and 4 cities, and we continue to expect property investment to fall 5% in 2016. 4. Structural reforms for effective supply. The CEWC highlighted structural reforms as a key development for 2016.
We think this means reducing overcapacity (possibly in the form of mergers and acquisitions, and bankruptcy) in industries closely related to the property sector, while increasing supply in the emerging industries which are undersupplied. Given the disproportionate share of over-supply versus under-supply industries in the economy, we think structural reforms are unlikely to offset the strong headwinds in the short term, although will likely increase long-term growth potential."
"The CEWC also stressed that “innovation” as key for growth potential, which we think should be driven more by market forces, while the government should focus on building an institutional environment. In general, we think the CEWC has delivered few surprises, and the policy outlook rolled out at the conference is consistent with our view. Therefore, we maintain our forecast of real GDP growth slowing to 5.8% in 2016 from an estimated 6.8% in 2015, but with some upside risk to this forecast."
Key Quotes:
"The CEWC stressed that the economy should run at a sustainable and healthy pace in 2016. We continue to expect the growth target to be set around 6.5-7.0% (most likely tilted to the lower bound) for 2016."
"However, we do envisage this target being missed, because of downside pressures from structural factors such as property oversupply, overcapacity and high leveraging. 2. Policy will be eased further in 2016 to stabilise growth. The CEWC reiterated a prudent money policy stance, but this time stressed higher flexibility, suggesting a more flexible floating exchange rate regime (RMB deprecation at a gradual pace) and interest rate liberalisation, in our view."
"This also increases the conviction of our forecast of four 50bp reserve requirement ratios cuts and two 25bp interest rate cuts in 2016. The conference also decided that fiscal policy should be more proactive with a larger fiscal deficit. We continue to expect the fiscal deficit to widen to 3.0% of GDP in 2016 from an estimated 2.8% in 2015, and an aggressive quasi-fiscal stimulus via policy banks.
Moreover, the government is to roll out measures to lower the corporate burden, such as corporate tax cuts. 3. Real estate destocking by encouraging property sales to migrant workers through cutting house prices, and possibly easier mortgage conditions."
"To resolve severe property oversupply, the government aims to boost demand, especially encouraging migrant workers to buy houses in the cities. Easier access to mortgage loans for homebuyers may be one option for stimulating demand, but we think the impact will be limited, because of rural households’ weak affordability (in 2014, disposable income per capita for rural households was RMB10489, less than 40% of RMB28844 for urban households).
Lower house prices may be another way to boost demand. In the press release, the government has encouraged property developers to cut prices to increase destocking. Moreover, it said that “obsolete restrictive measures should be revoked”. Could this indicate the removal of house purchase restrictions on second or third houses in the cities? If so, it may boost property sales in larger cities, whose properties are viewed more as investments, but is unlikely to provide much help to the smaller cities."
"Overall, we think these measures are unlikely to drive up property investment as oversupply is concentrated more in Tier-3 and 4 cities, and we continue to expect property investment to fall 5% in 2016. 4. Structural reforms for effective supply. The CEWC highlighted structural reforms as a key development for 2016.
We think this means reducing overcapacity (possibly in the form of mergers and acquisitions, and bankruptcy) in industries closely related to the property sector, while increasing supply in the emerging industries which are undersupplied. Given the disproportionate share of over-supply versus under-supply industries in the economy, we think structural reforms are unlikely to offset the strong headwinds in the short term, although will likely increase long-term growth potential."
"The CEWC also stressed that “innovation” as key for growth potential, which we think should be driven more by market forces, while the government should focus on building an institutional environment. In general, we think the CEWC has delivered few surprises, and the policy outlook rolled out at the conference is consistent with our view. Therefore, we maintain our forecast of real GDP growth slowing to 5.8% in 2016 from an estimated 6.8% in 2015, but with some upside risk to this forecast."