Amy Yuan Zhuang, an analyst at Nordea Markets, says China's economy is adapting to the new normal and it has transitioned from the export-dependent growth model to a more domestically focused one.
- Household consumption and the service sector have grown rapidly in recent years. But some things remain unchanged – businesses and consumers react the same way to every downturn, and so does the government. Intolerance for an uncontrolled growth slowdown makes the authorities turn back to old stimulus tools when facing headwinds.
- The Chinese authorities have made efforts to adapt to the new normal. But at every growth downturn, they take a step back to the old stimulus tools – mainly leverage-funded infrastructure investments – to stabilize growth. This is leading to ever larger leverage and housing bubbles, which we see as ticking bombs for China’s medium-term growth sustainability.
- We still expect limited movements in USD/CNY in the near term.
- We expect lower GDP growth and moderate inflation for the coming two years. Given the early signs of green shoots, we do not think any rate change is on the cards. We expect the CNY to stay broadly unchanged versus the USD but to weaken versus the EUR.