China: Downside Risk Returns – Danske Bank

Danske Bank analysts maintain a Negative outlook for the Chinese economy and growth forecasts have just been revised downwardsup 4.8% this year and 4.2% in 2024.

Notable Statements:

“Financial stress has risen again with another large developer, Country Garden, on the verge of default. Contagion to the shadow banking system has also surfaced with the default of a large trust company, Zhongrung International Trust Co. In addition , economic data has been disappointing overall, with lower-than-expected consumer spending, home sales and exports in recent months.Given these developments, we have revised downward growth to 4.8% this year and 4.2% next In our baseline scenario, we expect policymakers to intensify stimulus, as noted after the Politburo meeting in late July, and take further steps to improve funding channels of developers and stimulate home sales.We also hope that they will provide the necessary support to local governments and facilitate the restructuring of troubled major shadow banking entities. We believe that they will continue to push towards their 5% target and will do what is necessary to at least put a floor on growth so that it does not fall below 4-4.5%.”

“In early September, China took further measures to support the economy, lowering mortgage rates and reducing the down payments required for home purchases. Early signs point to some interest among home buyers, but if necessary China can make these tools more flexible Financing channels for developers can also be improved and on Friday 18 August the PBoC and financial regulators met with bank executives to ask them to provide more loans in support of economic recovery China is also likely to cut banks’ reserve requirement ratios (RRR) to free up more liquidity to buy credit bonds and increase lending RRR for small and medium-sized banks is 7.75% , while that of the big banks is 10.75%, so it has a lot of room to lower.Finally, if necessary, China could go for quantitative easing (QE) with the PBoC buying bonds directly on the market. This would serve as a strong signal that they are stepping in as a lender of last resort.”