Goldman Sachs is cutting its China growth forecasts for 2013 and 2014 – citing soft cyclical signals and a recent tightening of financial conditions.
The forecast is now for a real GDP groiwth of 7.5 per cent year-on-year in the second quarter of 2013 (revised down from 7.8 per cent), and 7.4 per cent and 7.7 per cent for 2013 and 2014 (from a respective 7.8 per cent and 8.4 per cent).
A note from Goldman Sachs said:
The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue....
The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems. These policies help to foster more sustainable medium-term growth, but will test the government’s tolerance for a cyclical downturn. A reversal of the recent tightening is the main upside risk to our new forecast. Continued DMstagnation or spreading overcapacity problems will imply downside risks....
The improvement in sequential growth in 2013 - from 6½ per cent in Q1/Q2 to 7.8 per cent in Q4, mostly reflects some recovery in domestic demand, as investment (in particular, infrastructure investment) continues to benefit from accommodative credit conditions earlier this year and consumption growth recovers somewhat from Q1. In 2014, we expect exports to be stronger along with improving world demand, while investment should start to decelerate as tighter credit conditions become more restrictive.
Goldman is the latest to join a number of banks and international agencies to take a more pessimistic outlook on China's growth forecast recently, with Nomura predicting GDP growth may fall below seven per cent in the second half of 2013.
The Chinese central bank - the People's Bank of China (PBoC) - has held back on pumping cash into the system as it has done during previous squeezes, and published a statement today saying that liquidity in China's financial system is "reasonable". It also called on financial institutions - particularly large commercial banks - to help the PBoC restore stability.
Chinese markets didn't respond well to the news, and the Shanghai Composite index closed below the 2,000 mark.
China's liquidity crunch takes its toll. Chinese shares tumble 5.3%, the biggest fall in over 4 years.— Jamie McGeever (@ReutersJamie) June 24, 2013