Growth continues to soften, but policy loosening should prevent over-slowing

The Conference Board Leading Economic Index® (LEI) for China suggests growth will continue to weaken in the near term. Policy loosening has started, as evidenced by policy statements and by loan and M2 growth, but these measures will take time to manifest; even then, they are unlikely to substantively reverse the trend of softening growth. Our outlook over the short term remains unchanged: in the forthcoming loosening cycle, deleveraging pressure will limit the scale of the pro-growth stimuli. Moreover, there is no more room for large-scale borrowing in the household, local government, or state-owned enterprise sectors to support domestic demand. A resumption, and possibly a slight quickening, of the “long, soft fall” in Chinese growth is the most likely scenario over the short term.