Goldman flags China stimulus risk as growth slips further below target
The desk posits that the ongoing slowdown in China’s economic growth, with Goldman Sachs projecting Q3 GDP near 4%, could keep pressure on the yuan and stifle any significant upside in Chinese equities. Per the full note from Goldman referenced in the research, the prevailing sentiment is that Beijing's looming policy response will likely be cautious and calibrated, preferring incremental adjustments over aggressive stimulus measures. As we head into August and September, we're likely to see heightened sensitivity to economic data releases, especially if they fail to indicate stabilization. Notably, the gap in growth forecasts underscores the uncertainty surrounding required fiscal support, which could heighten volatility in currency and equity markets.
What the desk is arguing
The desk frames this as a critical juncture for the yuan, with Goldman warning that growth dipping towards 4% poses a substantial risk if timely economic data does not illustrate a recovery. There is a particular concern regarding the repercussions for both Chinese equities and the yuan, which will be closely linked to forthcoming data in August and September.
Goldman Sachs suggests that growth has declined from 4.3% in Q2 to around 4% early in Q3, a slowdown driven largely by falling domestic demand. This slowdown is echoed across other firms with Macquarie at 4.2% and BNP Paribas at 4.1%, revealing a general expectation that unless growth improves significantly, fresh stimulus could be necessary after September.
Where it sits in our coverage
While no specific internal targets are listed, it’s worth noting that our consensus range for the yuan currently reflects expectations adjusting downwards in light of these projections. Both Goldman and BNP Paribas are highlighting the urgent need for policy action should growth remain weak into the third quarter, suggesting that maintaining upward momentum in the yuan will be challenging in the near term.
How other firms see it
Firms such as Macquarie and BNP Paribas are aligned with Goldman’s cautious perspective on China’s growth trajectory, emphasizing the risks associated with demand-led slowdowns. Conversely, some firms within the market might still hold an optimistic view that aggressive fiscal measures could drive a rebound, especially if more proactive measures are communicated by Beijing.
The outlook for USD/CNY remains crucial, with any deterioration in growth metrics likely to provoke significant market reactions. Likewise, indications from the PBOC regarding monetary policy adjustments will be key triggers for yuan traders to monitor moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Goldman Sachs estimates Q3 GDP growth for China at 4%, down from 4.3% in Q2, indicating a significant slowdown.
- 02Macquarie and BNP Paribas also forecast below-target growth figures, highlighting the need for potential stimulus.
- 03Upcoming data releases in August and September will be pivotal for market sentiment and future policy expectations.
- 04Chances of a reserve requirement ratio cut in Q4 are increasing, while benchmark rates may remain unchanged.
Market implications
Market participants should focus on the 4% growth mark for China as a potential trigger point. A lack of improvement in economic data could necessitate further policy adjustments from Beijing, influencing both the yuan and Asian equities. Traders should also keep an eye on potential communications from the PBOC regarding monetary policy shifts.
Risks to this view
A strong rebound in August or September data would undermine bearish sentiment and could prompt a shift in expectations for Chinese policy action. Should the authorities show a greater commitment to aggressive stimulus measures, particularly focusing on domestic demand, it could lead to a more rapid appreciation of the yuan.
A confirmed slowdown toward the 4% handle keeps pressure on Chinese equities and the yuan, particularly if incoming August and September data fail to show stabilisation. The gap between bank estimates, Goldman at the softer end near 4%, Macquarie near 4.2%, BNP Paribas at 4.1%, points to genuine uncertainty over how much fiscal and monetary support Beijing will ultimately deploy, which should keep policy-sensitive Asian equities and industrial commodities reactive to each fresh data point. Markets are likely to treat a reserve requirement ratio cut in the fourth quarter as the base case rather than a policy rate cut, given the PBOC's reluctance to touch benchmark rates amid lingering trade war pressure and firmer factory-gate inflation from higher oil prices.
Any signal from Beijing that moves beyond incremental support, particularly around consumption rather than supply-side manufacturing measures, would likely be read as a more durable positive catalyst for Chinese domestic demand plays than the current policy mix suggests. --- Goldman Sachs note via a weekend Bloomberg (gated) report. --- China's growth is sliding toward 4%, and while easing bets are climbing, Beijing still looks more inclined to tinker than to stimulate hard. Summary: Goldman Sachs estimates China's GDP growth slowed to about 4% year-on-year early in the third quarter, down from 4.3% in the prior quarter, with the deceleration described as demand-driven. Macquarie estimates July data implies monthly growth of about 4.2%, while BNP Paribas puts the figure at 4.1%, both below the pace needed to hit Beijing's 4.5 to 5% annual target.
BNP Paribas expects fresh stimulus in late September or early October if growth stays at or below 4% through August and September. The PBOC is expected to hold its policy rate steady through 2026 and 2027, according to a Bloomberg analyst poll, with a reserve requirement ratio cut seen as more likely in the fourth quarter. Premier Li Qiang has called on the government to ramp up supportive measures, and officials are considering loan subsidies and other financing support for businesses and consumers.
State media has defended China's economic performance, emphasising the quality of technological innovation and industrial development over headline growth rates, while Goldman warns this focus is unlikely to boost incomes or consumption. China's economic growth slipped further below Beijing's annual target in the early weeks of the third quarter, according to Goldman Sachs, reviving expectations that policymakers will need to step up monetary easing even as officials have so far only floated incremental measures. Goldman's chief China economist, Hui Shan, estimated in a report that gross domestic product growth was running at about 4% year-on-year early this quarter, down from 4.3% in the prior three months, with July's weakness in industrial output, consumption and investment attributed to softening demand rather than supply constraints.
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