Fitch Ratings has suggested that pessimism regarding China’s short-term outlook is “overdone” in its research report: ‘China’s New Normal: Slower Growth with More Volatility’.
The ratings agency stated an improvement in growth in the second half of the year is “already in the pipeline”, but admitted it expects China’s trend growth rate to gradually decline further as the country adjusts and rebalances its growth model.
Fitch stated: “Expectations for the economy’s growth potential in the medium term are shifting lower as the scale of the restructuring challenge becomes clearer. Fitch expects China’s trend growth rate to decline further as the country adjusts and rebalances.
“One scenario of gradual rebalancing could see the growth rate decline gradually to about 5 per cent on average over 2016-2020. The declining productivity of investment, the cost of supporting China’s high and still-rising debt burden, and emerging pressure on the Chinese yuan and foreign reserves all point to tightening constraints on China’s investment-led growth model.”
The firm also acknowledged that it expects more volatility around the ‘new normal’ of slower growth, both in real economic activity and in financial markets.
It added: “The authorities have experimented with more volatility in interbank funding markets, real estate prices, and recently equities and the currency. The major exception remains credit, where explicit default remains rare.
“Continued reluctance to permit explicit default could inhibit the re-allocation of the economy’s resources into new, more productive forms of activity, weighing further on medium-term growth prospects.”
