China Inside Out: Five macro themes for 2015

China Inside Out: Five macro themes for 2015

• With disinflationary pressure rising, we lower our GDP and inflation forecasts for 2015 and 2016
• Beijing will likely step up policy easing to stabilise the economy
• We also expect the pace of key reforms to accelerate

Both economic activity and inflation data have been weaker than we anticipated in recent months, suggesting rising disinflationary pressures. We lower our GDP growth forecast to 7.3% for 2015 (from 7.7%) and to 7.4% for 2016 (from 7.6%). We have also cut our CPI forecasts to 1.8% and 1.9% (from 2.9% and 2.7%). Despite these revisions, we remain more constructive than consensus GDP growth of 7% for 2015 and 6.7% for 2016 and consensus CPI of 2.3% and 2.5%. In this report, we identify five key macro themes for 2015.

Disinflationary pressures are likely to prompt more aggressive easing. Inflation is likely to stay below 2% in 2015, due to weak demand, spare capacity, and falling commodity prices. We expect more aggressive monetary and fiscal easing and forecast another two 25bps of symmetric rate cuts and three 50bps of reserve ratio cuts in 2015 versus our previous expectation of no change.

Infrastructure investment should remain strong. A long project pipeline is likely to sustain infrastructure investment in 2015, offsetting the slowdown in property investment. We expect further progress in the New Silk Road plan.

The economic impact of a cooling property market. The property slowdown will likely continue in 2015, but recent easing measures provide some support, and the economic impact remains manageable.

Faster reforms. We expect Beijing to accelerate fiscal, state-owned enterprise (SOE) and price reforms.

No big devaluation, but further measures to increase RMB capital account convertibility. We expect further steps to deregulate cross-border portfolio investment and promote RMB internationalisation.

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ENDS

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