China: PBoC’s Zhou points to 7% GDP in 2H – ING

According to Iris Pang, Economist at ING, twin growth engines, consumption and infrastructure investments, make China’s 7% GDP growth in 2H more possible, imparting upside risk to ING’s 6.8% forecast for 3Q.

Key Quotes

“Why does PBoC’s Zhou suggest 7% GDP in 2H? If we read the whole speech of Zhou then we can easily discover his analysis.”

“Zhou emphasised the need for deleveraging. And this time his focus is not only corporate leverage but also local government leverage. These two have a very different nature. The market or even the local governments themselves almost always believe that there are implicit guarantees on local government debts. If this conception is true then local government debts should be in the central government’s contingent liability account. Of course, the central government has highlighted to the market that this is purely a misconception.”

“But why is local government debt linked with the 7% GDP growth in 2H? That’s because local governments like infrastructure projects. Look at Xiong An New District, and the north-west part of China, where there is lots of infrastructure spending happening. So if there was a 7% surprise in 2H, it would probably be the effect of infrastructure growth.”

“We are not arguing that China has abandoned the consumption growth path. But we have to admit that potentially China could have twin growth engines, consumption and infrastructure investments. That makes 7% GDP growth in 2H more possible, imparting upside risk to our 6.8% forecast for 3Q.”

“Is local government debt worrisome? Yes and no. Depending whether the local government realises that it has to bear the repayment. If the central government is backing up the debts then local government debts would boom (because they don’t think they need to repay the debts), a real risk scenario. But, the central government has the upper hand, just like the first SOE bond to default recently, it could allow a local government debt to default as a wake-up call for local government borrowers before it’s too late.”