Economic Analysis - 2009 Growth Could Slow To 6-7%

Economic Analysis - 2009 Growth Could Slow To 6-7%

China - Economic Activity - 26 Nov 2008

We are dropping our 8.8% real GDP growth forecast for 2009 and now see expansion falling as low as 6.0-7.0%.

We see a growing risk of deflation in China.

Despite the central bank's aggressive 108bps interest rate cut and its reduction in reserve requirements for banks on November 26, we still see scope for further monetary easing over the coming months.

The yuan currency will largely remain unchanged at CNY6.8300/US$ for the foreseeable future.
Further underscoring our mounting concerns over the Chinese economy, the People's Bank of China (PBoC) unveiled a massive 108bps cut in both the one-year lending and deposit rates on November 26, bringing them, respectively, to 5.58% and 2.52%. In addition, the PBoC also reduced reserve requirements, by 100bps for the country's five biggest banks and 200bps for other lenders. This brings the reserve requirement ratios for the two classes of banks to 16.0% and 14.0%, respectively. Hitting The Panic Button
China - One-Year Lending Rate (%)


Source: BMI

The biggest interest rate cut since October 1997 sees the cost of borrowing return to levels last seen in April 2006, and clearly highlights Chinese concerns over slowing economic activity. Indeed, although the monetary authorities appear to have front-loaded their easing, we still see scope for further interest rate and reserve requirement reductions in the coming months as Beijing throws all the ammunition it has at the problem of sharply decelerating growth momentum. In addition to these measures, we also expect the yuan to remain largely unchanged for the foreseeable future, highlighting that risks remain to the downside (i.e. yuan depreciation still cannot be discounted), while direct controls over employment and wages also remain a possibility.
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