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China Business Forecast Report Q1 2015

  • December 2014
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Beijing will continue to implement positive structural reform measures such as deposit rate liberalisation and local government fiscal reforms. That said, we believe that the People's Bank of China will also continue to ease policy in order to support economic growth, and that high debt levels are therefore unlikely to be addressed in
the near-term.
Xi Jinping has largely consolidated his leadership position, and we believe that he is firmly in control of the Communist Party. This means that policy-making will remain highly centralised and generally cohesive over the medium term. While there remain divides on how to manage the economy, we continue to believe that the government will opt for the middle road of structural reforms with moderate monetary and some fiscal stimulus.

Major Forecast Changes

Following the PBoC's surprise interest rate cut to 5.60% in November 2014, we believe that the central bank has tipped a significant shift in its monetary policy agenda. Past precedent suggests that more cuts will follow, and we have downgraded our end-2015 interest rate forecast to 5.20% as a result.

Table Of Contents

China Business Forecast Report Q1 2015
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
Abe-Xi Meeting: Little Reason For Cheer 8
Despite the fact that Shinzo Abe's first meeting with Xi Jinping on the sidelines of the recent APEC summit in China represent s a
tangible step forward in relations between the two Asian powers, we do not believe that it will lead to a significantly more cooperative
relationship over the near-term. In particular, we find that domestic political realities will continue to inform relatively hard-line stances by
both Abe and Xi.
Table: Political Overview 8
Long-Term Political Outlook 9
Major Challenges Over The Coming Decades 9
China faces myriad economic, social and environmental challenges over the coming decades that could seriously test the Communist
Party of China's ability to govern. The best-case scenario for any eventual political transition would entail an elite-led liberalisation of the
authoritarian system, while the worst-case scenario would involve a violent change of regime.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Index 13
Economic Activity 14
Economy To Cool Further Despite GDP Outperformance 14
Despite the fact that real GDP growth of 7.3% year-on-year in Q314 was slightly better than consensus expectations of 7.2%, data
continue to point towards an ongoing economic slowdown. We maintain our forecast for real GDP growth to slow further to 6.7% in
2015, and note that aggressive stimulus measures are off the table as long as the country's labour markets remain stable.
Table: Economic Activity 14
Fiscal Policy 15
Fiscal Reforms Represent Progress, But Challenges Loom 15
The Chinese government's liberalisation of the local government borrowing system will be a long-term boon for the economy. However,
local governments may find it difficult in the near-term to meet their funding obligations while also rolling over rising levels of debt tied to
unproductive assets.
Table: Fiscal Policy 16
Currency Forecast 17
Headwinds Piling Up Against CNY 17
While the Chinese yuan has defied broad US dollar strength over recent months, we see headwinds against the unit piling up over the
coming quarters. With the PBoC exhibiting a dovish shift with its latest interest rate cut, we maintain our expectations for the unit to end
2015 at CNY6.2500/USD, representing a decline from the unit's current level of CNY6.1345/USD.
Table: Current Account 17
Monetary Policy 19
PBoC Gets Aggressive As Growth Continues To Cool 19
The PBoC's surprise interest rate cut on November 21 signals rising concern over the economy's slowing growth trajectory. Given that
the central bank has now made clear that it is willing to pursue more overt easing measures rather than the targeted ones that it had
favoured previously, we believe that another interest rate cut may be on the cards in 2015. As such, we have downgraded our end-2015
central bank policy rate to 5.20%, implying another interest rate cut equivalent to 40bps from the current level of 5.60%.
Table: Monetary Policy 20
4 www.businessmonitor.com Business Monitor International Ltd
China Q1 2015
Chapter 3: 10-Year Forecast 21
The Chinese Economy To 2023 21
6.0% Is The New 10.0% 21
China's economic growth in the coming decade will be much slower than in the last, as the savings rate declines, the economic
liberalisation process slows, and population growth falls. These dynamics will result in real GDP growth averaging 6.0% over the next
decade as opposed to the 10.1% average seen over the past decade. Private consumption will be a major outperformer, averaging
growth of 8.1% and rising in importance as a share of GDP.
Table: Long-Term Macroeconomic Forecasts 21
Chapter 4: Operational Risk 25
SWOT Analysis 25
Operational Risk Index 25
Operational Risk 26
Table: Operational Risk 26
Transport Network 27
Table: Asia - Transport Network Risk 28
Economic Openness 32
Table: Asia - Economic Openness 33
Tab le: Top Five Products Exp orted (USDmn) 34
Chapter 5: Key Sectors 37
Infrastructure 37
Table: Construction and Infrastructure Industry Data 38
Table: Construction and Infrastructure Industry Data 39
Oil and Gas 41
Table: Oil Production 42
Table: Oil Production 42
Table: Gas Production 44
Table: Gas Production 44
Other Key Sectors 45
Tab le: Pha rma Sect or Key Indicat ors 45
Table: Telecoms Sector Key Indicators 45
Table: Defence and Security Sector Key Indicators 45
Table: Food and Drink Sector Key Indicators 46
Table: Autos Sector Key Indicators 46
Tab le: Freight Key Indicat ors 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Warning Signs Growing 47
Table: Global Assumptions 47
Tab le: Developed States , Rea l GDP Growt H, % 48
Tab le: Emerging Ma rkets , Rea l GDP Growth , % 49

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