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China’s bumpy deceleration has further to run, CNY implications the most worrying – Goldman...

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 31, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) - Research Team at Goldman Sachs, expects the bumpy deceleration in China’s growth to extend into 2016, as policymakers wrestle with the aftermath of a massive debt build-up.

    Key Quotes

    “But the slowing in China’s growth trajectory is a pretty well flagged concern at this point, and we see a relatively low likelihood (below 20%) of a hard landing that takes Chinese activity run-rates to below 1% over the coming 12 months. If anything, our forecasts call for growth to improve a bit in the near term as activity recovers from prior shutdowns and is supported by a bout of fiscal spending and rate cuts.”

    “So there are two distinct market issues. The first is whether the parts of EM that are further ahead in their rebalancing process can stabilise, even as China continues to slow. The domestic demand impulse from China is likely to remain weak on a protracted basis as policy supports become increasingly less effective – capital outflow pressures are keeping liquidity tight, anti-corruption measures are blunting the incentive of local governments to spend their fiscal allocations, and it is hard to see credit expansion drive growth higher on a sustainable basis. So, equities and credit in EMs for whom China is a major source of final demand may struggle to decouple from the slowdown there, and heading into 2016 we prefer EM equities more exposed to DM demand.”

    “The second related issue is the potential for a significant depreciation of the CNY, which spills over into another leg lower across EM currencies. Given declining growth, there will be limited appetite to stomach significant further trade-weighted appreciation of the CNY through its tight USD peg, especially as it impedes policymakers’ ability to deliver easier financial conditions. Hence, the combination of a stronger USD (driven by policy divergence among the G3) and a deceleration in Chinese growth pushes towards a shift in the way the CNY is managed, with more depreciation the likely outcome. In our view, the fallout from such a shift is the primary risk to the EM FX complex in 2016.”
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