Forecast of China's Economy During 2015–2016
Assumptions of Exogenous Variables
Economic Growth Rates of the USA and the Eurozone
We expect the US financial situation to continue to improve through 2015. At the same time, driven by factors such as drop of the jobless rate and low oil prices, the growth of domestic demand in the US economy could overcome the adverse impact of the strong dollar and continue to recover steadily. On January 22, 2015, the International Monetary Fund (IMF) predicted that the USA will grow by 3.6 % in 2015 and that the growth rate will reach 3.3 % in 2016.
To overcome the pressure of deflation and boost the economy of the eurozone, the European central bank announced its quantitative easing (QE) policy on January 22, 2015. However, due to geopolitical reasons, the progress of structural reform is slow. The Greek political upheaval has further expanded the eurozone's political uncertainty, leading to the recovery being “weak and not balanced.” We expect a 1.0 % economic growth for the eurozone in 2015, which is lower than the IMF forecast in January (1.2 %). For 2016, as the IMF forecast, the growth could be 1.4 % (Fig. 3.1).
Major Exchange Rates
In 2014, at the spot exchange rate, the RMB depreciated by 2.5 % against the dollar, and the median price depreciated by 0.36 % annually for the first time. In January 2015, the official PMI fell lower than 50, creating a new lowest in 19 months, indicating a slowdown of China's economic growth. As the China-US economic trend indicates, overall, the dollar is on an appreciation cycle now, but the possibility that
Fig. 3.1 Assumptions of growth in the USA and the eurozone (Note: EU17GDP_C denotes growth in the eurozone, while USGDP_C denotes growth in the USA)
the RMB appreciates by phases cannot be ruled out. We expect the exchange rate to fall from 6.13 yuan to 6.14 yuan (median) to the dollar in the year 2015; in 2016, it may fall slightly to 6.16 yuan and then return to 6.15 yuan (see Fig. 3.2).
Faced with the eurozone's economic growth and low inflation or even deflationary pressure, the European central bank launched the European version of QE—the purchase of 60 billion euros per month until September 2016 or until the eurozone inflation reduces to 2 %. Starting from March 1 this year, the QE will continue 19 months, bring in a total of 1.14 trillion euros, and newly add 950 billion euros. Given that the USA may raise its interest rates in the second quarter, the dollar would continue to be strong and the euro would further weaken; thus, we expect the euro to fall against the dollar to $1.08 by the end of 2015, to the lowest level of $1.05 by the second quarter of 2016, and to then get back to $1.08, affected by the expectation of QE exiting in September 2016 (Fig. 3.2).
The Growth Rate of Broad Money Supply (M2)
In 2015, the Chinese economy could face a downward pressure and its prices may continue to fall. Thus, the velocity of China's monetary policy could slow down, and, as an important channel of currency, its foreign exchange might step into lowgrowth stages, the monetary policy transmission mechanism might possibly fail, and, while insisting on a steady tone, the central bank might maintain the preset of directional loose fine-tuning. After the central bank's announcement of reducing quasi on February 5, 2015, reducing quasi is likely to continue to drop one to two times a year and connect with the cut interest rates to stabilize growth. Given the expectation of the Federal Reserve raising interest rates in the second quarter of this year, the first half, especially the first quarter of the first half year, is a better time
Fig. 3.2 Assumptions of major exchange rates (Note: ER_W denotes the exchange rate of the RMB against the USD, and USDEURO denotes the exchange rate of the USD against the euro)
Fig. 3.3 Assumption of the growth rate of M2
window for monetary easing. Thus, the central bank is expected to cut interest rates by 25 basis points in the first quarter of 2015, the year the M2 growth rate is expected to rebound to 12.5 %. It will maintain this level basically in 2016, and the annual M2 growth rate will be 12.6 % (Fig. 3.3).
Fig. 3.4 Forecast of GDP growth rate (year-on-year basis)