China: Growth to remain around current levels amidst rising challenges - Nomura

Research Team at Nomura notes that China’s real GDP growth has been constant at 6.7% for the past three quarters, and Nomura shares the consensus view that Beijing will maintain its efforts to keep it at around this level in 2017, a year when politics is set to trump economics ahead of key leadership changes in Q4.

Key Quotes

“However, underneath this facade of remarkably stable growth is an economy addicted to credit, suffering from overcapacity and at risk of a financial crisis.”

“It is true that the consumption and services sector shares in GDP are rising, but rebalancing of the economy has been very slow. China urgently needs large-scale state-owned enterprise restructuring, re-pricing of credit risk and deleveraging, and market-opening policies to boost efficiency -- but all these reforms entail short-term pain for long-term gain, a trade-off that Beijing seems unwilling to accept. Yet allowing zombie companies to keep borrowing for so long has reached the point where it in itself is eroding growth by increasing debt-servicing costs, decreasing returns on capital and crowding out more efficient private investment. Add to this China’s shrinking labour force and languishing exports, and it leaves Beijing with little choice but to continue with monetary and fiscal stimulus if it wants to keep GDP growth close to the official 6.5% target.”