UBS' Zhang on China's Economic Outlook

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00:00In your report in November, you essentially assessed 2026 would be a little bit of a pullback

00:05for the Chinese economy, a decline in net exports, the domestic consumption story is still fairly

00:12tepid. What is your more recent outlook for growth this year? Thanks, Steve. Welcome to GCC. Thanks.

00:19So basically, we see a small deceleration of growth in China this year to around 4.5 percent,

00:25from last year around 5 percent. So the deceleration is mainly due to the smaller

00:31gross contribution from net exports. We're still seeing some challenges from continued

00:36propaganda, possibly slower exports, but the domestic resilience is still in place,

00:42like the cyclical rebound of investment and the modest but softer consumption growth.

00:48And eventually, people are looking at it very closely on rebalancing themes in China,

00:52which means innovation, anti-evolution, opening up, and also try to boost consumption in the

00:59longer term. So also, this year will not necessarily be the year of great stimulus,

01:04fiscal or monetarily, right? It's sort of a readjustment period?

01:08Yeah. It's kind of moderately supportive, but more balanced support from the government.

01:14For example, the fiscal deficit may stay unchanged at 4 percent, but there's some greater issuance

01:20of special bonds. And also, there's some readjustment of the trading subsidies. But meanwhile,

01:26we still see PBOC can cut the interest rate by maybe 20 BPs.

01:29So if net exports are going to be declining a little bit and GDP is about 4.5 percent,

01:34where are we going to get the contributions to basically hold up the growth? Because the 15th

01:40five-year plan essentially names consumption as the main goal. But will it be a main driver?

01:47We are seeing two things here. Of course, first of all, cyclical rebound investment for the

01:53infrastructure, per se. The other one is long-term, per se, we are seeing more positive on consumption.

01:59But in the near term, we are still seeing some challenges on consumption growth because of the

02:04trading subsidies diminishing and also there's some lingering headwind from the housing price

02:11decline. But more importantly here, we are seeing a rising power of the innovation and the new economy

02:16sectors.

02:16Which is interesting because AI and other areas of the new economy contributed, I guess from your

02:22report and the estimates, between what, 15 to 20 percent of GDP. That's quite sizable. In an industry,

02:29AI alone is not profitable.

02:31Yeah, exactly. So the 15 to 20 percent contribution, that's more than AI. That's a broadly defined

02:37innovation and the new economy sectors. We're seeing more R&D spending, more commitment from

02:43the government should push up the further contribution from the new economy sectors in the next five

02:48years, maybe by another three to five percent points.

02:51Really? So the next three to five years, you got three to five percent increase?

02:55Yes, exactly.

02:56Okay. So anti-involution campaign has been ongoing in areas like solar and in EVs and in batteries.

03:04But we've also seen a slew of startups in the AI space, Minimax and others, raise money in

03:09Hong Kong. But they're not profitable and there's no real horizon for profitability in these large

03:14language models. So how does the anti-involution campaign impact that so these new startups in

03:22the AI space can be profitable and contribute greater to growth?

03:26Eventually, we need to see the AI play to generate profits. But now that's in the early stage of

03:33corporate capex and building your frontier in the future and even for so-called self-sufficiency

03:40extreme in China. That's why we believe China will focus on the balance between, okay, how to develop

03:46the frontier sectors versus how to rebalance the supply-demand balance. And that's anti-involution

03:52campaign same, which means reviving inflation, reviving profitability and eventually getting

03:57stronger and getting larger.

03:59What is your outlook for inflation? It's ticked up slightly on CPI, but oftentimes it's food or

04:04cyclical nature. PPI also improved a little bit, but it's still in persistent three-plus

04:10years of deflation. Are we going to see an end to factory deflation this year or is that

04:15going to be a long-term trend?

04:16At the bottom of the year, we see CPI rebounding slightly to 0.4% and even more next year. PPI

04:22is narrowly declining in this year and possibly turning positive next year, which means we're

04:27not very far away from the old inflation turning positive.

04:31What role does the RMB play? Because we've just seen the numbers. It's now appreciated past

04:38that seven-handle. What role will the authorities use the RMB to maintain growth?

04:44RMB, from the fundamental perspective, we're seeing RMB to appreciate versus the basket of

04:53currencies. But again, because our house will believe dollar may rebound a little bit in the

04:58second half of this year, that's why versus dollar, RMB may hover around seven.

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