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Slowing growth and eroding policy buffers

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General Information

GDP USD 10360bn (World ranking 2, World Bank 2014)
Population 1364.3 million (World ranking 1, World Bank 2014)
Form of state Communist State
Head of government Li KEQIANG
Next elections 2018, presidential and legislative


Country Rating B2note-circle-med-risk


  • Strong FX reserves and external surpluses
  • Large domestic market
  • Huge industrial base
  • Solid growth prospects
  • Low public and external debt
  • Improvement in macro-prudential management
  • Increasing market orientation 


  • ​Ageing population
  • Difficult business environment, lack of transparency
  • High corporate debt
  • High inequality, low share of private consumption to GDP regarding the economic performance
  • Competitiveness erosion 
  • Key sectors with overcapacities especially steel and solar
  • Continued geopolitical tensions with key countries in the region 


Economic Overview

GDP growth to slow to +6.5% in 2016 

GDP growth is set to decelerate to +6.5% in 2016. Exports would remain a drag on growth this year with a modest demand expansion in the U.S., the European Union and weak new orders from large emerging markets. Private investment will grow at a slower pace limited by a high corporate debt and ongoing overcapacity reduction. 
Against this background, policy support is set to accelerate in the form of a large fiscal stimulus. The monetary stance will also be supportive but more cautious in order to contain credit risk. After a slight slowdown in H1, private consumption is expected to pick up gradually thanks to higher purchasing power and improved confidence. 
Non-payment risk will likely remain elevated. Insolvencies are expected to grow by +20% in 2016 (from +24% in 2015).  Risks are tilted to the downside in the short run and stem from both external and domestic sources. Externally, a prolonged slowdown in exports will weigh on economic activity. Internally, higher credit risks and delayed reforms should reduce overcapacity while restructured SOEs will undermine the long-term growth outlook.


Strong stimulus erodes policy buffers

The policy stance is very accommodative with elevated risks of creating unintended consequences. Since 2014, monetary policy has been relaxed significantly to avert a sharp slowdown of the economy and curb deflationary pressures. The results were twofold. The economy has proved resilient and deflationary pressures started to decrease. However, stimulus efficiency has diminished and credit risk has increased rapidly. The NPL ratio for banks increased from 2014 (1.25%) to Q1 2016 (1.75%), corporate debt rose to 171% GDP in 2015 (from 157% in 2014). Against this background, the monetary stance will have to be more cautious. On the fiscal side, public debt is set to increase. The government has decided to expand its support, targeting a fiscal deficit of -3% GDP this year (compared to a target of -2.3% GDP last year). 


External position shows signs of weaknesses but remains strong overall

The current account surplus is large due to a robust trade surplus. Despite a strong fall in reserves since H2 2015, external vulnerabilities remain under control with large import cover and low external debt. On the currency front, downward pressures persist due to diverging monetary policy with the United States and investors’ concerns. 
Last review: 6/22/2016