China: Policy may loosen in Q2 2017 – Deutsche Bank

Analysts at Deutsche Bank expect Chinese growth to slow to 6.2% yoy in 2017Q1 mainly due to the slowdown in the property sector as the government will face a difficult choice between achieving the growth target of 6.5% and containing risks in the property sector.

Key Quotes

“We think they will choose growth and start another round of policy easing by Q2 after economy shows signs of weakness.”

“The fiscal policy easing is well expected in the market. We expect growth of infrastructure investment will pick up to 23% in 2017 from 17.6% ytd in 2016. Indeed we have witnessed a wave of PPP projects built up in the Ministry of Finance’s database.”

“The question is whether infrastructure by itself is sufficient to keep growth above 6.5%. We think it is challenging, because property sector and fiscal revenue are closely linked. Land sale revenue accounted for 35.8% of local government revenue this year. If the current trend in land sales continues, local government will experience a large contractionary fiscal shock in 2017, as they did in H1 2015. They will face difficulty in financing the infrastructure projects. For more discussion on the link between land sales and local government revenue, please see our report China’s unexpected fiscal slide, Jan 5 2015.”

“The other issue on the government’s mind is probably the risk of leveraged developers. Our research shows that if property prices stay at September level, about 23% of land sales in China between July 2015 and early Sept 2016 may face loss. If policy tightening continues into H2 2017, property prices may drop, some of the developers who bought land at expensive prices may face trouble.”

“If policy in the property sector eases in 2017Q2, the property bubble will likely become bigger in H2 2017, and impose macro risks in 2018. We therefore cut our GDP forecast for 2018 to 6.0% and expect more RMB depreciation.”