We revise up China real GDP growth forecast to 6.1% YoY in 2020 vs. 5.9% YoY previously, we update our 2020-21 macro forecasts based on the following 2 changes to our key assumptions (vs. Nov. 2019):
►Potential de-escalation of China-US trade tension may boost aggregate demand growth, esp. that of exports and mfg. FAI.
►Earlier and more decisive counter-cyclical efforts in China will also curb the downside risks to domestic demand growth, particularly in regards to the domestic credit cycle and property FAI growth.
With real GDP growth closer to trend, we foresee 2020 nominal GDP growth accelerating to 8.5% YoY, from ~8% YoY in 2019. The potential “deal” between China & US may change the paths of relative prices. We lift our 2020 PPI forecast to 1.2% from -2% on the back of improved global mfg. demand outlook. We lower our 2020 CPI forecast for 3.3% from 3.8% -- since agri. imports from the US may curb the upside of food CPI in China.
We see USD/CNY trading at around 6.72 by end-2020. Under the current set-up of bilateral trade agreement –
►Potential de-escalation of the trade friction will likely strengthen the value of the Renminbi, on top of the anticipated USD weakness.
►Cyclical stabilization may also help support the Renminbi.
We see risks to our forecasts lying in the progress of the trade negation, as well as China’s domestic policy execution. If China and the US agree on further scale-backs of existing tariffs than we now anticipate, there will likely be more upsides to China’s nominal growth and the CNY exchange rate, and vice versa. Meanwhile, domestic policies, esp. financial deleveraging and property market-related ones, hold the key to the sustainability of domestic demand reflation.
For more details, please see our report Lifting our growth and CNY forecasts for 2020-2021 published in January 2020.