Barclays has just released research lowering its GDP growth forecast for China to 7.1% in 2014, from 7.4% previously.
While the near term growth outlook has improved, Barclays sees growth slowing into 2014 on the back of “industrial sector overcapacity, financial and fiscal risks (high corporate and local government debt, intertwined with risks associated with a growing shadow banking sector), a latent property bubble, and lower potential growth”.
Barclays also believes that the Chinese government will cut its official GDP growth target to 7% from 7.5% currently in the March NPC meeting next year, citing the economy’s lower potential growth and the need for China to rebalance its economy away from fixed asset investment.
In the short-term, however, Barclays has revised up its 2013 growth forecast to 7.6% from 7.5% previously, following the recent pick-up in economic activity. This short-term pick-up in growth reflects: “a shift of policy focus to ‘stabilising growth’ since early July, when the government committed to a bottom-line for growth at 7-7.5%. Other factors include: 1) the lagged impact of the rapid credit expansion in H1; and 2) stronger external demand from the US and euro area”.
In the longer-run, Barclays believes that structural reforms in areas such as administration, fiscal policy, state owned enterprises, land ownership, social security, financial sector, and resource pricing, are necessary to ensure that China can reach its growth potential and avoid falling into the “middle income trap”.
