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China Country Risk Report Q1 2020

Published by Fitch Solutions, Inc. Product code 203072
Published annual subscription Content info 71 Pages
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China Country Risk Report Q1 2020
Published: annual subscription Content info: 71 Pages
Description

We have revised our 2019 and 2020 real GDP forecast to 6.1% and 5.9% respectively, a reflection of our expectation for external headwinds to continue weighing

on the economy in 2020. Investment is likely to remain under heavy pressure as companies increasingly relocate away from China, and those which do not are

likely to postpone or shelve plans for renewal and expansion. We also believe private consumption and net exports will continue to drag, but less so, as demand

side stimulus measures and slowing imports are likely to cushion the impact.

We have revised our forecast for China's current account surplus for 2019 and 2020 to 1.5% and 1.0%. The revision accounts for a larger fall in imports than

we previously expected, which has helped to support the trade balance. We continue to expect China's current account surplus will diminish in future owing to

China's rebalancing towards consumption. We expect inbound portfolio investment to play a larger role in balancing the balance of payments accounts over

the coming years, as China gradually opens up its financial markets to foreign investors.

We maintain our forecasts for China's primary and final fiscal deficit to come in at 4.8% and 2.8% of GDP respectively in 2019. For 2020 we expect the fiscal deficit

to widen to 5.2% of GDP. We expect revenue collection to remain weak owing to tax cuts and slowing economic growth. Additional fiscal spending is also likely

given that Beijing's focus on stimulating growth amid a weak economic growth outlook.

We maintain our view for yet more monetary easing following the RRR cut announced on September 6, which will take effect in phases out to November. The estimated

CNY900bn liquidity injection from the 50bps broad cut and 100bps additional targeted cut will help support economic activity and financial stability. Continued external

headwinds from the US-China trade war is likely to see Beijing cut the RRR further and easier monetary policy is likely to remain in place over the coming quarters.

The yuan still faces downside pressure as we believe that a re-escalation in trade tensions between the US and China is likely despite the apparent detente. We

expect inflation in China to outpace that in the US through 2020 on the back of food inflationary pressures from pork shortages, but Beijing's willingness to

stabilise its currency would somewhat offset our bearish arguments. We are revising our average exchange rate forecasts to CNY6.90/USD in 2019 and CNY7.25/

USD in 2020 and 2021 to account from stronger-than-expected yuan performance in Q419.

Major Forecast Changes

We have revised up our forecast for China's real GDP growth to come in at 6.1% in 2019 and 5.9% in 2020. We have revised our forecast for the yuan to average

CNY6.90/USD in 2019 and CNY7.25/USD in 2020. We have revised our forecast for China's current account surplus for 2019 and 2020 to 1.5% and 1.0% respectively.

Key Risks

Our yuan forecast assumes no lasting and comprehensive resolution to the US-China trade war in 2020 and is thus subject to upside risks.

Weak revenue collection could spur local governments to take on additional debt to fund development spending, which raises the risk of an unsustainable build-up

of debt. The State Council called for an increase in special purpose bond issuances to fund additional spending on infrastructure and other development projects.

This adds to the debt burden of local governments, which stood at around 20% of GDP in 2018 [excluding its off-balance sheet debt from local government financing

vehicles (LGFV)]. When Beijing undertook massive fiscal stimulus programmes after the 2008 financial crisis, cash-strapped local governments created opaque LGFVs

to meet economic growth targets. This not only undermined their competitiveness and profitability but also resulted in a significant increase in debt. While China has

introduced debt-for-bond swaps programmes since 2016, which allows local governments to swap their unofficial liabilities for government bonds, much of the debt

from LGFV remains hidden from their balance sheets.

China Country Risk Q1 2020fitchsolutions.com

Table of Contents
Product Code: CFCN_20200101

Table of Contents

Executive Summary

  • Core Views
  • Major Forecast Changes
  • Key Risks
  • Country Risk Summary
  • Economic Risk Index
  • Political Risk Index
  • SWOT
  • Economic - SWOT Analysis
  • Political - SWOT Analysis
  • Economic Outlook
  • Economic Growth Outlook
  • China's Real GDP Growth To Come In Under 6.0% In 2020
  • GDP By Expenditure Outlook
    • TABLE: GDP GROWTH FORECASTS
    • TABLE: PRIVATE CONSUMPTION FORECASTS
    • TABLE: GOVERNMENT CONSUMPTION FORECASTS
    • TABLE: FIXED INVESTMENT FORECASTS
    • TABLE: NET EXPORTS FORECASTS
  • External Trade And Investment Outlook
  • Falling Imports To Remain A Key Driver Of China's Current Account Surplus
  • Outlook On External Position
    • TABLE: MAIN EXPORT AND IMPORT PARTNERS
    • TABLE: MAIN EXPORTS AND IMPORTS
    • TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
    • TABLE: CURRENT ACCOUNT BALANCE FORECASTS
  • Fiscal Policy And Public Debt Outlook
  • Slowing Economic Growth To Weigh On China's Primary Fiscal Balance
    • TABLE: REVISION OF PERSONAL INCOME TAX
  • Structural Fiscal Position
    • TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
    • TABLE: FISCAL AND PUBLIC DEBT FORECASTS
  • Monetary Policy
  • Not The End Yet For China's Monetary Easing Cycle
  • THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.China Country Risk Q1 2020ContentsMonetary Policy Framework
    • TABLE: MONETARY POLICY FORECASTS
  • Currency Forecast
  • Still Bearish On Chinese Yuan Despite Phase One Deal Rally
    • TABLE: CURRENCY FORECAST
  • 10-Year Forecast
  • The Chinese Economy To 2028
  • Structural Slowdown To Span The Next Decade
    • TABLE: LONG-TERM MACROECONOMIC FORECASTS
  • Political Outlook
  • Domestic Politics
  • Hong Kong Rights Act A Key Risk To Trade Talks
    • TABLE: POLITICAL OVERVIEW
  • Long-Term Political Outlook
  • Major Challenges Over The Coming Decades
  • Operational Risk
    • TABLE: OPERATIONAL RISK
  • Economic Openness
    • TABLE: TARIFF AND NON-TARIFF TRADE BARRIERS
    • TABLE: FREE TRADE AGREEMENTS
    • TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES
    • TABLE: BARRIERS TO FDI
  • Utilities Network
    • TABLE: ELECTRICITY RISKS
    • TABLE: FUEL RISKS
    • TABLE: TELECOMMUNICATION RISKS
    • TABLE: WATER RISKS
  • Global Macro Outlook
  • Lower Growth Despite Some Trade Progress
    • TABLE: GLOBAL MACROECONOMIC FORECASTS (2018-2023)
    • TABLE: DEVELOPED MARKETS - REAL GDP GROWTH, % y-o-y
    • TABLE: EMERGING MARKETS - REAL GDP GROWTH, % y-o-y
  • Index Tables
    • TABLE: CHINA - MACROECONOMIC DATA AND FORECASTS
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