Mainland set for quality growth

The Chinese mainland economy will see "slower but higher quality growth" in the second half of this year, Industrial and Commercial Bank of China International said, retaining its 6.7 percent full-year prediction for GDP growth.

In the first quarter of this year economic expansion hit an 18-month high of 6.9 percent year-on-year. Cheng Shi, chief economist of ICBC International, noted the rebound was mainly driven by the fiscal, monetary and exchange-rate easing expansion in the fourth quarter of year 2015; this boost is not expected to continue beyond the second quarter of this year.

Financial tightening moves such as deleveraging should lead to a pull-back in the second half. But deeper supply-side reform and improved consumption－with internal consumption being the main growth driver amid a weak global recovery－will lead to higher quality growth, Cheng said at a media briefing on Monday.

He believed the yuan would stabilize and there was little chance the currency would weaken beyond 7 per US dollar. He estimated the yuan would appreciated slightly, from 6.95 to 6.93.

Qiu Zhicheng, strategist at ICBC International, said the lender was prudently optimistic about the H-share market and bullish on the A-share market.

Hong Kong's stock market was boosted by global capital flows, but faced great pressure as the world's major economies adjusted monetary policy, he commented.

Cheng agreed, saying downsizing of the United States Federal Reserve's balance sheet would start gently in the fourth quarter of this year and gain traction in the following two years. He predicted downsizing of $600 billion to $800 billion over two years.

For the mainland market, to offset the impact of rising interest rates followed by a flurry of stringent financial regulations, Qiu pointed out the government would introduce proactive fiscal policy, especially after the 19th National Congress of the Communist Party of China which is due to be held later this year in Beijing.

He expected H-shares to see a correction of 5 percent to 10 percent in the latter half of this year. As the valuation of the mid- and small-cap stocks in A-share market had dropped significantly, he estimated small-cap stocks would rally 10 percent while big-cap stocks would rise about 5 percent in this period.

The biggest mainland commercial bank bet on large financial enterprises, which would benefit from deleveraging, and an infrastructure sector which would benefit from a proactive fiscal policy.

The Bond Connect program kicked off last Monday with more than 7 billion yuan ($1.02 billion) traded by foreign investors on the first day.

ICBC said the scheme was a milestone towards mainland bonds being included in Morgan Stanley Capital International indices, but added the strong momentum of the first day was hard to maintain.

As for the much-discussed southward flow, the bank said the timeframe depended on northbound flows and government regulations on capital outflow, which were unlikely to change in the short term given the prevailing factors.