UBS: RMB Will Depreciate Slightly In The Next Six Years When China'S Economy Enters The "Next Year".

According to Reuters, the international investment bank, UBS released its 2015-16 year economic outlook report on Monday, saying that although the steady growth policy will increase in the future and the steady recovery of the US economy will also support external demand, the real estate downturn will drag on the domestic demand in the next two years, so it is expected that China's economic growth will enter the "six" era in the next year.

UBS also said that in order to cushion the decline in real estate and external uncertainties, it is expected that the decision-making level will accelerate the reform of the service sector conducive to growth and expand the coverage of social security to promote consumption and investment in the service sector.

The decline in real estate will also accelerate the pace of reform in the areas of local government financing, capital markets and restructuring of state-owned enterprises.

The investment bank said that, considering the strength of the US dollar, it is expected that the RMB will depreciate slightly against the US dollar. The exchange rate of RMB against the US dollar is expected to reach 6.35 at the end of 2015, and 6.40 at the end of 2016.

According to Reuters's comprehensive survey of more than 10 institutions, China's economic growth rate is expected to be 7.3% in the fourth quarter of this year and 7.4% in the whole year. The four quarter growth will slow down by quarter, 7.2%, 7.1%, 7% and 6.9% respectively, and the whole year is expected to be 7.1%.

Under the pressure of China's downward pressure on the economy, the central bank finally decided to cut interest rates and restart the traditional monetary policy tool that has been frozen for more than two years.

The Central Bank of China announced last Friday that the one-year lending and deposit benchmark interest rates of financial institutions were reduced by 0.4 and 0.25 percentage points respectively from November 22nd (Saturday).

In addition, the upper limit of the floating rate of interest rates for financial institutions will be adjusted to 1.2 times the 1.1 times of the benchmark interest rate.

{page_break}

The following is an excerpt from the UBS report:

Real estate downturn is expected to drag on 2015-16 years of economic growth.

We expect China's GDP growth to slow down to 6.8% in 2015 and 6.5% in 2016.

The downturn in real estate is still a major drag on domestic demand and the overall economy. It will continue to curb construction activities, heavy industrial production and investment, exacerbate the local government's financial difficulties and drag down its revenue growth.

The real estate industry has been faced with structural turning points of oversupply and weak internal demand.

Against this background, although the recent relaxation of the purchase and loan restriction policy will help to improve market confidence and boost sales in the coming months, accelerating the pace of household registration reform will also support housing demand to a certain extent, but the real estate sales rebound in the short term is very difficult in the short term.

In addition, even if the future policy is further relaxed, we expect developers to continue to reduce land acquisition and construction next year in order to digest inventory pressure and adapt to the structural inflection point of the industry.

We expect that the new construction area in 2015 will fall by 10-15% on the basis of 10% decline this year, and it will not be stable until 2016. The growth rate of construction activity measured by construction area is expected to slow down to 0-5% in 2015 and fall slightly in 2016.

We expect that the continued slowdown in real estate construction activities will bring greater and greater negative drag on industries such as metals, mining, building materials, machinery, automobiles and household appliances.

The decline in demand in these industries and the deterioration of cash flow will further affect their investment.

As income growth slows down, plus negative wealth effects, consumption will eventually be hard to get rid of.

Our sensitivity analysis shows that the growth rate of real estate and construction output slows by 10 percentage points, and the direct and indirect drag on GDP growth will reach 2.5-3 percentage points.

We expect that the real estate downturn this year has dragged down GDP growth by 1.2-1.5 percentage points, while the "micro stimulus" measures only offset part of it.

Under our benchmark forecast, the slowdown in real estate construction in 2015 will still drag GDP growth by about 1.5 percentage points.

We expect that the real estate downturn will lead to the adjustment of the real economy through the various channels of demand side to bring inflation (disinflation) or even deflation pressure.

Metals and mineral products were the first to bear the brunt of the price.

Overcapacity in the industrial sector is likely to intensify, thereby further inhibiting the prices of industrial products.

The decline in real estate and industrial activity will also lead to slower wage growth.

In view of this, even if food prices rise and some public utilities price rises will bring some support to inflation in the future, we expect CPI inflation in 2015 to fall to 1.8% from 2.2% this year.

Then, as commodity prices stabilize and food prices continue to rise, the CPI inflation rate in 2016 will probably rise slightly to 2%.

A steady growth policy and a global economic recovery should play a cushioning role.

In view of the fact that the real estate downturn has seriously dragged down the economy, we expect that next year, the decision-making level will continue to increase the policy of steady growth.

In terms of real estate policy, the decision-making level in the future may also reduce the proportion of the down payment of mortgage loans which is still relatively high, reduce the interest rate of mortgage loans, or reduce the tax and fee of paction links.

In addition, the decision-making level may speed up the reform of household registration in the three or four line cities.

In addition, we expect that the decision-making level will launch a number of strong infrastructure projects.

The matching funds will come from policy banks, increase the scale of issuing government bonds, or attract social capital through the promotion of PPP mode.

{page_break}

The sustained recovery of the developed economies in the next two years is expected to support China's external demand.

UBS expects global economic growth to accelerate from 3.3% in 2014 to 3.5% in 2015 and 3.6% in 2016.

Benefiting from the backlog of demand, the uncertainty of economic recovery, the easing of financial conditions and the return of fiscal policy to the Middle East, the US (expected growth rate from 2.3% in 2014 to 2.9%/2.8% in 2015/16) and the UK are expected to lead the global economic recovery.

At the same time, although the recent economic data show weaker than expected, we expect that the euro area GDP growth will rise to 1.2%/1.6% in 2015/16.

Against this background, we expect that China's export growth will accelerate to 8.5% in 2015.

The factors restricting the strong rebound of exports include: (1) the UBS global macro team study found that the demand elasticity of imports in developed economies showed signs of decline; (2) our research shows that China's export competitiveness in some sectors has been weakened due to the sharp rise in labor costs over the past few years and the appreciation of the renminbi.

On the other hand, driven by weak domestic demand, import growth is expected to be slower than exports.

Therefore, we expect net exports to boost the 2015-2016 year GDP growth by 0.2~0.4 percentage points, thereby counteracting the weakness of domestic demand to a certain extent.

Slowing economic growth should not bring obvious pressure to employment.

Since 1990s, China's GDP growth has never dropped below 7%, which is largely due to the fact that policymakers often introduce strong stimulus policies in the face of internal and external shocks and prevent growth from slipping.

The main logic behind this is to protect employment and indirectly maintain social stability.

If the growth rate of GDP in 2015-16 years is below 7%, will there be big problems in employment? Can policymakers tolerate this slowdown?

We believe that for the labour market itself, the GDP growth rate to 6.5% will not bring about major problems.

First, according to comparable prices, the current size of China's economy is 3.6 times that of 10 years ago and 2.5 times that of 2008.

If the economic structure does not change, even if the current GDP growth rate is reduced to 6.8% and the employment growth rate will slow down, the new employment created will be roughly the same as that created by the GDP growth rate of 11% in 2008.

Secondly, the labor intensity of the service industry is 50% higher than that of the industry. Since 2011, the service industry has increased rapidly and the proportion in the economy has also improved significantly.

This may be one of the important reasons for the steady labor market in the past few years.

Third, the decision-making level has greatly simplified the approval process of the service industry, especially small and micro enterprises, reduced their taxes and fees, and also lowered the access threshold for medical, insurance, public utilities, logistics and other industries.

These measures will help to support job growth in the coming years.

The factors of supply side are equally important.

China's working age population has begun to decrease, and the supply of new labor has been declining.

According to the United Nations Population agency, the size of the working age population has hardly changed over the past five years, and 8 million people will be reduced in the next five years.

Of course, with the pfer of surplus labor from the agricultural sector, the supply of labor in the non-agricultural sector will continue to increase in the future.

However, with the reduction of the working age population, even if the economic growth slows down, the pfer of agricultural labor to non-agricultural sector will not be affected too much.

{page_break}

Compared to ten years ago or even a few years ago, the change in supply and demand in the labour market meant that the employment pressure faced by China has eased, so the economic growth rate needed to stabilize employment is also lower than before.

Assuming that labor productivity continues to rise steadily, coupled with the gradual increase in the proportion of labour intensive services, we estimate that in the 2015-16 years, the non-agricultural sector GDP will grow by 6-7%, and the overall GDP growth will be 6-6.8% enough to create new non farm employment of more than 11 million people per year, so as to maintain the stability of the labour market.

In the longer term, with the further pfer of agricultural labor force and the growth of service industry, the growth rate of GDP below 6% can also maintain the stability of the labor market.

Of course, this does not mean that the job market will not face downward pressure next year.

The employment data are lagging indicators, and because the projects started several years ago are still in the construction stage, coupled with the rapid growth of infrastructure investment in the past two years, the construction activities of the whole society have not yet declined significantly.

With the further decline in real estate related construction activities in the future and more mining and heavy industry enterprises stop production, we believe that the employment market will face more pressure and more unemployment in 2015.

It is necessary to prevent financial risks by strengthening liquidity support and cutting interest rates.

In view of the current employment pressure is not obvious, there is a view that the decision-making level may tolerate the spontaneous adjustment of the real estate industry, in order to promote economic restructuring and rebalancing.

Considering the high debt, overcapacity and low efficiency of credit allocation, if we implement the extremely loose monetary policy and stimulus measures similar to those implemented after the global financial crisis, we will only further exacerbate the structural imbalance and accumulate financial risks. This has also become a consensus in the decision-making circle.

But even so, it is necessary for policymakers to ensure that the adjustment process is as smooth as possible.