China central bank holds line on growth forecast

Steel exports by China increased by 3.7% in May from the month before, after a surge in domestic prices boosted output

China's central bank slashed its forecast for exports on Wednesday, predicting a second straight annual fall in shipments, but said the economy will still grow 6.8 per cent this year.

The People's Bank of China (PBOC) also warned in its mid-year work report that the government's push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds.

And ahead of a meeting of the US Federal Reserve's policymaking board next week, it said the pace of US interest rate rises would affect global capital flows and emerging market currencies, but it did not mention the yuan.
 

''Since the beginning of this year, the global and domestic economic environment has experienced a number of changes,'' the PBOC said in the report. ''Reflecting these recent developments, we revised our China macroeconomic forecasts for 2016. Compared with our published forecasts in December last year, we maintain our baseline projection of 2016 real GDP growth at 6.8 per cent.''

The report was released shortly after monthly data showed China's exports fell an annual 4.1 per cent in May, more than expected and the 10th decline in the past 12 months.

Imports were more encouraging, however, declining only marginally and much less than expected, pointing to improving domestic demand and adding to views that the economy may be slowly stabilising. Preliminary commodity trade data showed sharp rises in imports of copper and iron ores.

''We don't expect the trade figure will change the PBOC's attitude toward the (yuan) exchange rate. They still prefer stability,'' wrote ANZ economists in a research note. The yuan has fallen this week after disappointing US jobs data saw markets pare back expectations of a US rate rise.

US officials have been in China this week pressing China to reduce trade barriers for foreign businesses, and also expressing concern that Chinese firms in glutted sectors like steel are dumping under-priced goods in offshore markets. Those concerns are unlikely to be relieved by the May trade data, as steel and rare earth exports continued to rise.

Despite cutting its forecast for exports to minus 1 per cent from growth of 3.1 per cent, the PBOC saw a domestic recovery remaining on track. It upgraded its forecast for fixed-asset investment growth to 11 per cent, an increase of 0.2 percentage points from estimates it made late last year.

A government spending spree on major infrastructure projects and a continuing recovery in the housing market have boosted demand for materials from cement to steel.

China's trade shrank 8 per cent last year, compared with the government's goal for 6 per cent growth, in the worst performance since the global financial crisis.

The PBOC also said it expected consumer price inflation to pick up to 2.4 per cent this year, 0.7 percentage points higher than its earlier forecast and signalling that worrying deflationary pressures seen in 2015 were easing.

Indicators from the consumer, investment and factory sectors have suggested the prolonged slowdown in the world's second-largest economy may be bottoming out, and many analysts no longer expect much in the way of aggressive policy easing going forward, given concerns about rising levels of bad debt.