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Nomura: 5 Reasons to be Pessimistic About China

Just passing along an out of consensus view.  This was one of David Rosenberg’s tail risks mentioned the other day and is obviously a big driver of global growth.  While China appears to have landed softly, Nomura analysts still see risks to the downside:

“We reiterate our out-of-consensus view that growth will surprise on the downside in H2. We expect GDP growth to slow to 7.3% y-o-y in H2 from 8.1% in H1, for a full-year 2013 average of 7.7%, while the consensus expects the growth recovery to sustain above 8% throughout 2013.

First, there are increasing signs that the government is concerned about financial risks. The China Banking Regulatory Commission (CBRC) has asked banks to control the risks in the “fund pools” practice, which allows banks to pay back maturing wealth management products by issuing new products.

Second, another round of energy/utilities price reform appears to be in the pipeline. On 20 February, the National Development
and Reform Commission (NDRC) and the Ministry of Railway (MOR) raised the rail freight tariff by 13.0%, from RMB0.1151 per ton-km to RMB0.1301, the largest hike since 2003. The tariff hike suggests that the government may move to lift other administratively suppressed prices, such as electricity and other public utilities, which will exert upward pressure on inflation.

Third, the property price rebound – the composite property price index of 70 cities has risen for seven consecutive months – may
force the government to tighten credit supply/M2 growth, which should also act as a drag on growth, since property investment is a large component of fixed asset investment.

Fourth, local governments have lowered their growth targets for 2013 by an average of 0.5pp from 2012.

Lastly, the severe air pollution reported throughout China could act as a wake-up call for Chinese leaders, and may spur them to rethink the current growth model.”

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