China: External uncertainty adds to domestic risk – BNPP

Research Team at BNP Paribas notes that the Chinese economic activity has regained stability since Q2 as industrial production growth has stayed at 6% y/y, thanks to improved fixed-asset investment.

Key Quotes

“Investment in infrastructure and property has picked up, but consumer demand has slowed.”

“PPI inflation has bounced back sharply this year and October saw the end of 54 months of deflation. On the back of a campaign to cut overcapacity, prices of coal and steel have rocketed. International demand could also drive up producer prices.”

“Worsening external uncertainty might intensify the risk of a downward trend in growth. As growth stability is key for the 19th Party Congress in autumn 2017, we think an aggressive fiscal policy remains the most prominent policy option.”

“Unlike the market, which expects loose monetary policy, we believe the stance will be neutral in 2017. The benchmark rate will probably not change, with a possible cut in the reserve requirement ratio for liquidity management rather than monetary policy.”

“The major risks next year are to RMB stability, official FX reserve maintenance and the capital account. These stem from the US – its potentially tougher trade relations with China, fiscal aggression and rate hikes by the Federal Reserve.”