NOMURA: Chinese Growth Will Fall Below 7% Next Year
Economist Zhiwei Zhang gives three reasons for reducing the firm's 2014 GDP forecast to 6.9%.
First, we believe the government may lower its annual growth target to 7% for 2014. While this decision will not be made until the Central Economic Working Conference in December, the government has made it clear to the public that it is less concerned about the growth rate and more about the quality and sustainability of growth. We believe lowering the growth target would be a sound policy to adopt.
Secondly, we believe China has likely entered a prolonged period of deleveraging, which will last well into 2014. Clear signs of systemic financial stress have seen the new government acting to rein-in credit growth since it took office in mid-March and we believe it is determined to bring down leverage. That said, a sharp deleveraging process is to be avoided as that would cause a disruptive slowdown in the economy; the liquidity squeeze in June illustrating just how easily a tightening could lead to unintended consequences. We therefore believe a gradual and prolonged deleveraging is the most likely scenario (see China may enter a prolonged period of policy tightening, 24 June 2013).
Thirdly, potential growth continues to slow and may drop below 7% in 2014. The size of the working-age population fell in 2012 – for the first time in at least 20 years – and will likely continue to slide in 2014 and beyond. Progress on structural reforms has been slow. The government has announced guidelines twice in the past five years to encourage private investment, but concrete action has been limited. When the Central Committee of the Communist Party meets in October, it is expected to lay out the reform agenda for the next five to 10 years. We expect some positives to help growth recover modestly in H2 2014, but do not expect reforms to fully offset the negative effects of deleveraging and the demographic trends through H1 2014.