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China Country Risk Report Q1 2016

  • December 2015
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

Reports that the IMF will vote to include the Chinese yuan in itsspecial drawing rights basket by the end of November reflect anotable success for the embattled People's Bank of China (PBoC),as well as a symbolic milestone in China's rise to global economicprominence. However, we do not believe that the move will providesignificant support for the CNY over the medium term, and retainour forecast for the currency to average CNY6.68/USD in 2016.Xi Jinping has largely consolidated his leadership position, andwe believe that he is firmly in control of the Communist Party. Thismeans that policymaking will remain highly centralised and generallycohesive over the medium term. While there remain divides on howto manage the economy, we believe that an increased emphasiswill be placed on monetary stimulus as growth continues to slow.That said, targeted fiscal measures are also likely, as the pace ofthe slowdown has likely surprised Beijing to the downside, andgrowth-negative reforms will be increasingly difficult to implement.Major Forecast ChangesHigh frequency macroeconomic indicators, including rail freight volumes,import growth, purchasing managers' indices and steel exports(among others), paint the picture of a rapidly cooling economy, andwe continue to believe that headline GDP figures do not encapsulatethis trend.

However, given the fact that the Chinese government islikely to announce a 6.5% annual real GDP growth target for thenext five years, we note that it is unlikely to print a figure significantlybelow this rate for 2016. As such, we have upgraded our 2016 realGDP forecast to 6.3%.

Table Of Contents

China Country Risk Report Q1 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
The Political System And Xi Jinping's Sources Of Power8
Chinese President Xi Jinping's status as China's most powerful leader since Deng Xiaoping stems from his ability to elicit broad-based
support from various factions and powerbases within the party
TABLE: POLITICAL OVERVIEW8
Long-Term Political Outlook 13
Major Challenges Over The Coming Decades13
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 17
SWOT Analysis 17
BMI Economic Risk Index 17
Economic Growth Outlook 18
Households, Services Faring Well Despite Headline GDP Slowdown18
China's real GDP growth slowed to 69% y-o-y in Q315, its slowest pace since Q109, as manufacturing and construction activity
continued to act as a drag However, strong growth in the tertiary sector suggests that the country's nascent rebalancing is making
progress Robust household income growth has also been a silver lining to China's slowdown
GDP By Expenditure Outlook 19
TABLE: GDP GROWTH FORECASTS19
TABLE: PRIVATE CONSUMPTION FORECASTS19
TABLE: GOVERNMENT CONSUMPTION FORECASTS20
TABLE: FIXED INVESTMENT FORECASTS20
TABLE: NET EXPORTS FORECASTS20
External Trade And Investment Outlook 20
Data Divergence Belies Underlying Economic Weakness20
Top-line macroeconomic indicators such as fixed asset investment, industrial production and headline real GDP growth continue to
trend gradually lower in China However, other indicators such as import growth, steel production and exports, energy consumption and
rail freight reflect a deeper slowdown, and we believe that this set of data is more indicative of the underlying weakness in the economy
Outlook On External Position 21
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE21
TABLE: MAIN EXPORT and IMPORT PARTNERS22
TABLE: MAIN EXPORTS and IMPORTS22
Fiscal Policy And Public Debt Outlook 22
'Two-Child' Policy No Panacea For Structural Demographic Shift22
The outline of the Chinese Communist Party's 13th five-year plan has served up few surprises on Beijing's policymaking direction over
the coming years, and as always the implementation of the broad policy objectives will be key While the abolition of the one-child policy
is a powerful symbolic statement, we stress that it will not be sufficient to reverse China's structural demographic trends, and that the
mainland's ageing population will have considerable economic and social effects over the long-run
Structural Fiscal Position 24
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES24
Monetary Policy 25
Rate Cut To Undermine Yuan25
The People's Bank of China's decision to lower interest rates further on October 23 will do little to support economic growth and will
further undermine confidence in the yuan, which we expect to weaken considerably over the coming months The rate cut will not be the
last, and we maintain that some form of quantitative easing will ultimately be relied upon to prevent a credit crunch and the associated
debt-deflation cycle
Chapter 3: 10-Year Forecast 27
Monetary Policy Framework 26
Fighting Multiple Headwinds27
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 59% over the next
decade, as opposed to the 100% average seen over the past decade Private consumption will be a major outperformer, averaging
growth of 80% and rising in importance as a share of GDP
TABLE: LONG-TERM MACROECONOMIC FORECASTS27
Chapter 4: Operational Risk 31
SWOT Analysis 31
Operational Risk Index 31
Operational Risk 32
TABLE: OPERATIONAL RISK32
Education 34
TABLE: ASIA - EDUCATION RISK34
TABLE: GRADUATES OF TERTIARY EDUCATION BY SUBJECT, 2008-201236
Government Intervention 37
TABLE: ASIA - GOVERNMENT INTERVENTION RISK38
TABLE: TAX % AND MONTHLY INCOME (CNY)40
Chapter 5: BMI Global Macro Outlook 43
Global Outlook 43
Emerging Markets Bending, Not Breaking43
TABLE: GLOBAL ASSUMPTIONS43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %45

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