Divyang Shah, Senior IFR Strategist
Market forecasts for China’s growth have been moving lower and recently some banks have lowered their estimates of growth below 7.5%.
The real story is that the growth challenge seems to be more structural with the IMF in its updated forecasts downgrading its view for China significantly.
It was understandable that the 2013 outlook was revised to a still optimistic 7.8% (-0.3% points from April forecast) but what was more significant was that 2014 is seen at 7.7% (-0.6% points from April forecast).
The fact that policy makers are not hitting the stimulus button highlights that this is a China that no longer wants to rely on large-scale fiscal stimulus or PBoC liquidity to meet short-term objectives.
Reforming the economy in order to promote more lasting growth is key. While the liquidity shortage of June was ill-timed and poorly communicated, the intention was to clamp down on ultimately unstable credit growth.
Given how serious China is about its growth makeup and a desire that the economy should move away from a credit or investment boom related growth, we might find that they are more flexible as to the growth target than has been assumed. Indeed, the focus might simply be to allow growth to slowly move lower and prevent a violent adjustment in expectations.
After all, we have become accustomed to growth no longer running at near double digits.
