June 9,2014   P9
In the last three years, economic growth in China has
been trapped in a downward channel with fluctuations
from mini-cycles. We believe we are more than halfway
through this cyclical downturn in the last two quarters.
With more low-profile easing measures to help, we
expect to see growth improvement starting in 3Q14.
We lower our real GDP growth forecasts to 7.0% YoY
for 2014 and 7.2% YoY for 2015: Our new 2014
projection incorporates flat sequential growth in Q2 and a
moderate rebound in Q3 and Q4, helped by incremental
escalation of policy easing measures the government
gradually introduces. We also roll out our forecasts for
reform dividend payout by two more quarters into 2H2015
to reflect the delay in reform implementation.
We are also lowering our CPI inflation forecasts to
2.2% YoY for 2014 and 2.8% YoY for 2015, from 3.2%
and 3.6%. The recent gradual rise in food prices will
likely keep headline CPI inflation readings safely above
2%, while non-food price inflation trends downward.
We now expect a rate cut in 3Q14. Whether the
targeted easing measures introduced will manage to
lower the funding costs remains to be seen, especially
given the tighter regulations on inter-bank lending
activities implemented recently. In addition, with better
readings in the May PMI, policy makers may become
more hesitant in adopting more easing measures, and
risk doing too little too late. These low-profile measures
that the government favors tend to have a limited
signalizing impact, and are unlikely to substitute for a
25-bp cut in the benchmark interest rates.
We view the most important step as loosening
financial conditions and boosting confidence when
necessary . The fear of liquidity flowing into LGFVs and
sectors with losses should not hijack monetary policy
adjustments due to the delay in fiscal, SOE and financial
structural reforms.