2021 baseline growth forecast is revised up from mid 8% to high 8%, prompted by the stronger-than-expected 2Q growth and the “no over-tightening” policy signal sent by the recent RRR cut, but a more constrained off-budget fiscal spending.
· We expect solid growth in 2H. There are, however, a number of uncertainties including:
o Soft consumption recovery: a hiccup or a permanent loss.
o Strong exports: how much longer it can sustain.
o Regulatory tightening: how far the government will push it, including property, tech, de-carbonization, LGFV, etc.
o Liquidity/Financial market: how overhanging credit events such as Huarong will unfold.
· The recent RRR cut was clearly not driven by weak economic data, instead it should be a pre-emptive move and an effort to balance policy tightening in different areas.
· Policies likely will be data dependent. Credit growth is one of the most critical indicators of PBOC’s monetary policy stance. We believe the sharpest decline of credit growth should have been behind us. Credit growth may continue to decelerate modestly in 3Q before stabilizing in 4Q, ending up the year in the range of 10.5% to 11%y/y. Our baseline expects no rate cut and no more RRR cut this year, but another RRR in 4Q cannot be completely ruled out as liquidity need will be high and growth may slow into 2022.
· On-budget fiscal spending will pick up in 2H along with the accelerating government bond issuance. But LGFV borrowing likely will remain constrained as the government is making efforts to contain implicit local government debt.
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Source: PIMCO, By Carol Liao, China Economist at PIMCO