China: Downside risks return – Danske Bank

Analysts at Danske Bank maintain a negative outlook for the Chinese economy and recently revised down growth forecast to 4.8% this year, and 4.2% in 2024.

Key Quotes:

“Financial stress has increased again with another major developer, Country Garden, at brink of default. Contagion to the shadow banking system has also come to the surface with a big trust company, Zhongrung International Trust Co missing payments. On top of this economic data has disappointed across the board with both consumer spending, home sales and exports undershooting expectations in recent months. Taking these developments into account we have revised down growth to 4.8% this and 4.2% next year. In our baseline scenario we expect policy makers to step up stimulus as broadly signalled following the Politburo meeting in late July and to take more measures to improve financing channels for developers and lift home sales. We also expect them to provide the necessary lifelines to local governments and facilitate a restructuring of major shadow banking entities in distress. We believe they will still strive to reach their 5% target and do what is necessary to at least put a floor under growth so it does not fall below 4-4½%.”

“In early September China took new steps to support the economy by lowering mortgage rates and reducing the required down payments for house purchases. Early indications are that it has already spurred some home buyer interest but if needed China can ease more via these tools. Funding channels for developers can also be improved and on Friday18 August, PBOC and financial regulators met with bank executives telling them to direct more lending to support an economic recovery. China is also likely to cut Reserve Requirement Ratios (RRR) for banks to free up more liquidity to buy credit bonds and increase lending. The RRR for small and medium sized banks is 7.75% while it is 10.75% for large banks and thus has plenty of room to be lowered. Finally, if needed, China could opt for quantitative easing (QE) with PBOC buying bonds directly in the market. This would serve as a strong signal that they step in as lender of last resort.”