Nomura Slashes China’s 2016 Economic Growth Forecast To 5.8% From 6.7% As Slowdown To Deepen

Japanese investment bank Nomura has slashed its economic growth forecasts for China for 2016, citing a faster-than-expected pace of economic rebalancing as its primary concern.

The bank trimmed China’s economic growth forecast for 2015 to 6.8 percent from 6.9 percent, however the bank has a bearish view in 2016 as it sees a dramatic economic slowdown to deepen and economic growth to slow to 5.8 percent from its previous estimate of 6.7 percent.

The pessimistic view from Nomura follows those from the Asian Development Bank (ADB) and World Bank, both of whom lowered their forecasts for China’s 2016 economic growth to 6.7 percent.

“The official data sends a clear message that Chinese economic growth is not that good,” said Yang Zhao, China’s Chief Economist at Nomura, whom added that Beijing is likely to cut its 2015 official growth forecast to 6.5 percent from “about 7 percent”.

“There is still a chance that the government will miss that target due to strong headwinds,” said the Chief Economist.

The primary drag on its economy is its cooling property market, which has brought slower growth to related sectors, which includes manufacturing and construction, Nomura said.

Property investment growth in China during the first nine months of this year has slowed to 3.5 percent, from 20 percent in 2013. Zhao further expects investments to “drop to negative territory” in 2016, which would be the first time since 1997, due to an oversupply of housing in its lower-tier cities.

China’s Central Bank, the People’s Bank of China (PBOC), will likely continue monetary easing  by cutting the bank reserve requirement ratio by 50 basis points on four separate occasions in 2016, in order to curb capital outflow driven by a weakened yuan, Nomura said.

As growth in China continues to slow, credit defaults will become an issue as the investment bank expects to see Chinese banks reporting rising levels in non-performing loans.

Confronting the elephant in the room — if growth in China were to slow so drastically — how bad could it get? Nomura said: “to see an outright contraction in Chinese GDP, the government would need to step aside completely. That seems unlikely, in our opinion.”