MNI 5 Things: China Economy May Contract Slightly Q2: BOC

--Bank Of China Sees Modest Q2 Slowdown As Exports, Investment Slow 

     BEIJING (MNI) - China's economy will contract modestly in the second

quarter of 2018 on weaker investment and sluggish exports, the Bank of China,

one of the biggest four state-owned banks, told reporters in a press conference

on the economic and financial outlook Wednesday.

     The continued financial deleveraging and ongoing risk prevention campaign

will also bring further uncertainty to the economic growth.

     - Economic performance is expected to slow modestly in Q2 with GDP growth,

with at 6.8%, as external demand loses steam, the rapid expansion in real estate

investment slows from unsustainable levels and support from proactive fiscal

policy weakens. BOC predicts GDP growth in Q1, officially announced Apr 17, will

be 6.9%, 0.1 percentage point higher that Q4 2017, helped by strong exports and

a rebound of property and private investment.

     - Inflation will inch higher in Q2, with CPI rising as labor cost and

service demand boosts the food and service prices. But PPI growth will slow

compared with the same period last year as the excess capacity reduction move

has largely balanced market supply and demand. But for the whole year, expects

CPI may centre around 2.5%, peaking at above 3% in July, pressured by strong

global growth and rising oil prices.

     - Bond yields may see upward momentum in Q2 as the previous loose liquidity

will be back to a level of "tight balance" after the stricter regulatory rules

are unveiled. Increased issuance of local government bonds in Q2 will intensify

the contradiction of supply and demand in the bond market and push up bond

yields. The rise of U.S Treasury yields will also restricts the fall of Chinese

bond yields.

     - The yuan will suffer depreciation pressure against the green back in Q2

and the two-way trading band may widen. The Sino-US interest rate spread is

narrowing, which could trigger capital outflow and pressure the yuan, the bank

said. The spread between 10-year USTs and CGBs has narrowed to 88 bps from 144

bps in early January. The weaker economy will not provide much support for the

currency. The Sino-US trade war and Federal Reserve's expected three to four

rate hikes in 2018 will negatively impact the yuan.

     - The People's Bank of China will further enhance macro-prudential

management, focusing on shadow banking, particularly off-balance sheet and

interbank transactions. The central bank will strictly manage cross-border

capital flows and closely monitor the influence of international changes, and it

will also control leverage in real estate sector via differentiating household

credit policies, BOC said.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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