Latest economic data confirm China’s continued negative momentum as a result of weak external and domestic demand (particularly investments in the real estate). Still, China’s GDP growth could stabilise at close to 7% this year. Beijing has indeed used a battery of pro-growth measures in the past half year to prevent the slowdown from being more pronounced. Besides accelerating infrastructure spending, Chinese authorities have contained the property downturn by softening various restrictions; they have launched huge debt swaps to ease local government default risks and boost their spending, and they have repeatedly eased the monetary policy through lower bank reserve requirements and cuts in interest rates – the fourth one was decided at the end of June. However, the weak loan demand from deleveraging corporates and over-indebted local governments will contribute to fuelling China’s soft landing in the future and bringing the country to a lower growth potential.

Impact on country risk

The transition to a “new normal”, i.e. lower economic expansion in a sustainable domestic environment, is President Xi Jinping’s most challenging goal, especially given the country’s huge debts, declining property sector and risks to financial stability. So far, the authorities have broadly managed to keep control of the economic situation but partly at the cost of extra stimuli (albeit far from those in the aftermath of the 2008 global crisis) that further delay the gradual transition to a model based on internal consumption. The latter, though on a constant rising path, is still far from becoming the country’s leading growth driver. Given the likelihood of a persisting slowdown of GDP – potentially ending up under 7% – combined with deflationary pressures and rising payment difficulties among Chinese companies, extra monetary easing seems likely in the second half year. As a matter of fact, Beijing remains concerned by fast-increasing job losses and resulting social protests which can threaten social stability and the Communist Party’s legitimacy. Therefore, Beijing is expected to pursue its reform drive notably with the liberalisation of bank deposit rates and the further internationalisation of the renminbi – including its candidacy to the IMF’s SDR basket – that will accompany its continued worldwide expansion of trade and investment flows.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com