Goldman Sachs is out with a new report tonight in which they note that China is likely to grow slower than many anticipate. The note authored by Li Cui cuts expected GDP growth for the world’s second largest economy from 7.8% to 7.4% for the year. Further details below.

China banks

China GDP Forecasts

We are cutting our China growth forecasts for 2013 and 2014, on the account of soft cyclical signals and recent tightening of financial conditions. We now expect real GDP growth to be at 7.5% yoy in Q2 2013 (from 7.8% previously), and 7.4% and 7.7% for 2013 and 2014 respectively (from 7.8% and 8.4% previously).

China Credit Growth

The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue. We estimate this to tighten the FCI by another 30-40 basis points (bp) in the coming months, in addition to the FCI tightening of 100 bp so far this year driven by the rapid CNY appreciation on a trade-weighted basis.

The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems. These policies help to foster more sustainable medium-term growth, but will test the government’s tolerance for a cyclical downturn. A reversal of the recent tightening is the main upside risk to our new forecast. Continued DM stagnation or spreading overcapacity problems will imply downside risks.

The economic weakness post the global financial crisis has been mostly met with loosening domestic funding condition, while the exchange rate has appreciated steadily. The changing global conditions should enable a more balanced financial policy mix in China. We expect limited upward pressure on the CNY against the USD, and CNY NEER appreciation to moderate as the USD becomes steadier. This will be a supportive factor as the policy makers pursue a range of reforms that may be growth negative in the near term.

China Goldman by ValueWalk.com