China’s economic growth would stay above target though recovery momentum fades, said Fitch recently.
Recent data point to a swiftly fading rebound in China from the reopening at end-2022, but GDP growth should still remain above the 2023 government target of 5% as consumption normalises and policy support buttresses infrastructure investment, the credit rating agency pointed out.
“We expect growth to hold up relatively well, albeit on a slowing trajectory, at 4.8% in 2024 and 4.7% in 2025,” Fitch noted.
Incoming data since April have pointed to weakness, according to the firm.
The manufacturing Purchasing Managers' Index, for instance, has been below 50 for the past three months, indicating contraction in manufacturing activity, while China’s exports fell by 12.4% yoy in June, with the sector outlook remaining clouded by weak global demand prospects. Housing construction also remains very weak, the firm said.
In line with this, real GDP growth in 2Q23 was below our expectation at 6.3% year-on-year, after the unexpectedly strong 4.5% expansion in 1Q23, the firm added.
Nonetheless, Fitch said it still expects China’s economic growth to hit5.6% in full-year 2023 as the economy normalises following very weak consumption growth in 2022.
China’s economic growth will be underpinned by accommodative policy settings, in particular for fiscal policy, according to the firm.
Fitch forecast the budget deficit to remain stable at 6.5% of GDP on a Fitch-consolidated basis.
The government is likely to lean on infrastructure investment to help drive expansion, albeit less so than in the past, the firm predicted.
Infrastructure fixed-asset investment has been resilient, growing by 6.4% year-on-year in June, up from 4.9% in May, Fitch noted.
The firm estimated that China’s government debt would rise further, even as local government finances have come under pressure amid weak land sale proceeds and higher spending pressure.
The government has signalled modest monetary easing with a 10bp cut to the medium-term lending facility rate in June, Fitch said.
Fitch noted that it doesn’t expect any further policy rate changes this year.
Instead, further cuts to banks’ reserve requirements ratio look likely after the recent dip in credit growth, the firm added.
Growth in Fitch’s adjusted measure for aggregate financing slowed to an estimated 9.6% year-on-year in May and June, from 10.1% in April.
It remains unclear how effective looser credit conditions will be in stoking activity in the near term, especially if consumer and business confidence remain subdued, Fitch said.
“Our base case assumes the authorities will avoid a large credit stimulus, as significant increases in leverage could weigh on the sovereign’s credit profile and add to systemic financial risk,” Fitch said.
However, more modest stimulus moves may struggle to gain traction and to boost business and consumer sentiment, Fitch predicted.
The government's recently announced measures to support property developers, including allowing postponement of their loan repayments by a year, may help stabilise the sector, Fitch observed.
Housing completions have picked up, suggesting that work on stalled projects has resumed, the firm noted.
However, property sales and starts fell again in June by 28% and 34% year-on-year, respectively, highlighting the risk of extended residential construction weakness, the firm said.
The property sector is unlikely to regain its position as a key growth driver, but consumption will remain of high importance to China's economic growth, Fitch estimated.
Retail sales growth slowed sharply to 3.1% yoy in June 2023, from the 18.4% growth in April that was an almost two-year record, Fitch pointed out.
However, retail sales continued to expand on a month-on-month basis, the firm said, adding that it continues to believe that falling unemployment should support consumer confidence and demand in the second half of the year, but risks to economic growth forecasts would mount if consumption does not recover momentum in 3Q23.