Boston, MA -- (SBWIRE) -- 06/12/2013 -- We are starting to see signs of a broader realisation on the part of Beijing that the previous government's state investment-led policies were inherently unsustainable and risk systemic crisis. Should the new leadership reduce support for loss-making state-dominated industries, this would mean a much weaker H213 and 2014 for China's economy than the consensus currently expects. Extensive structural reform, while unlikely, could trigger a near-term growth collapse but lead to a major improvement in the country's long-term prospects. We are therefore sticking with our below-consensus 2013 growth forecast of 7.5%.

View Full Report Details and Table of Contents

New total social financing hit another record high in March, taking total credit-to-GDP to 200%. Surprisingly, consumer price inflation has remained very subdued, but we continue to see further increases over the coming months. That said, with potential instability the shadow banking system hanging over the economy, rising loan defaults pose a major deflationary force. Renewed economic weakness in H213 should cool consumer price inflation, however, and we are forecasting an average rate of 2.8%, with an end-2013 target of 2.6%. The main risk comes from further expansionary policies, which we believe could result in the emergence of stagflation.

China's net external assets have fallen as a share of GDP over recent years, from a peak of 34.0% in 2007 to 21.4% in mid-2012 (the latest data available). Even in absolute terms, the country's net external assets have been in decline for the last two years as the return on their assets has been much smaller than on their liabilities. Over the coming years, smaller current account surpluses, and even lower returns on US treasury holdings, will see net external assets fall further, reducing the buffer that China has to defend against any potential economic crisis.

Despite the fact that China has ushered in a new generation of leaders at the inaugural 12th National People's Congress, we believe that the government is unlikely to pursue a course dramatically different from that of the Hu Jintao administration. While we are likely to witness gradual economic reforms, especially with regards to the liberalisation of the capital account, meaningful political reform is unlikely over the next five years given the conservative nature of the Jiang Zemin-aligned Politburo Standing Committee.

Major Forecast Changes

We have upwardly revised our yuan forecast for 2013 owing to recent strength, although we continue to expect the currency to weaken over the remainder of the year. We are forecasting an average rate of CNY6.2000/US$, down from our previous forecast of CNY6.3500/US$.

About Fast Market Research
Fast Market Research is an online aggregator and distributor of market research and business information. Representing the world's top research publishers and analysts, we provide quick and easy access to the best competitive intelligence available. Our unbiased, expert staff will help you find the right research to fit your requirements and your budget. For more information about these or related research reports, please visit our website at http://www.fastmr.com or call us at 1.800.844.8156.

Browse all Country Reports research reports at Fast Market Research

You may also be interested in these related reports:

- Brazil Business Forecast Report Q3 2013
- Croatia Business Forecast Report Q3 2013
- Germany Business Forecast Report Q3 2013
- Philippines Business Forecast Report Q3 2013
- Chile Business Forecast Report Q3 2013
- Kuwait Business Forecast Report Q3 2013
- United States Business Forecast Report Q3 2013
- Bulgaria Business Forecast Report Q3 2013
- Malaysia Business Forecast Report Q3 2013
- Slovakia Business Forecast Report Q3 2013