China stabilizing or still too leveraged? - UOB

Analysts at UOB explained that China released its 3Q16 GDP report earlier this week with headline growth at 6.7%y/y, the same pace as in 1Q and 2Q of this year.

Key Quotes:

"While this is the slowest pace of expansion in more than 7 years, it remains within official growth target of 6.5-7.0% range for the 13th 5-year plan period (2016- 2020). On a sequential basis, growth momentum remained respectable at 1.8%q/q from 1.9%q/q in 2Q16 (data revised up from 1.8% reported previously) and well above the trough of 1.2% in 1Q16. 

With the 3Q GDP report, we remain positive on China’s growth outlook into 4Q16 and 2017, as the momentum in tertiary (services) sector should continue to lead and buffer any shortfall that might come from manufacturing sector. In addition, credit creation remains on track that should provide support for growth in the quarters ahead. All in with the underlying momentum and policy support, we do not expect China’s full year growth in 2016 to deviate significantly from our forecast of 6.7%, and this means that 4Q GDP growth is likely to come in at similar pace of 6.7%. 

Into 2017, we expect the pace of expansion to decelerate somewhat towards 6.6% with deleveraging the main risk factor. There remain significant challenges for China such as high private sector debt and leverage, surge in property prices, excess industrial capacity, and capital outflows, but we believe these are manageable. 

With recent data pointing to stabilization, concerns over debt and leverage, as well as signs of property prices surging, we think that the PBoC will take a more cautious approach in not overly using monetary policy too aggressively. Therefore we expect at most just one interest rate cut and 2x RRR cuts by end-2016."