B&E | China's Economic Slowdown Will Continue in 2016

The growth slowdown in China has been most noticeable among enterprises operating in the manufacturing and real estate sectors. Growth forecasts have been revised down to 6.9 percent in 2015 and 6.7 percent in 2016.

By World Bank 

Sectoral re-balancing in China became more pronounced in 2015. It was accompanied by bouts of volatility in financial markets and additional government stimulus measures. Growth in 2015 is estimated at 6.9 percent, down from 7.3 percent the previous year. The deceleration reflects an ongoing correction in the property sector, weakness in industrial activity, and slower growth in non-traditional credit. The robust expansion of consumer spending and services has helped boost the economy, and is in line with the re-balancing sought by policymakers. Even so, forecasts for 2016-17 have been downgraded, with growth expected to reach 6.5 percent by 2017.

In line with re-balancing efforts, the deceleration in activity during 2015 has been most visible in industry and real estate—sectors with considerable overcapacity and, in the case of industry, a high presence of state-owned enterprises (Figure 1.6). These sectors saw the sharpest increase in investment and leverage in 2009-13, resulting in a significant concentration of debt among a small number of large firms (Chivakul and Lam 2015). Balance sheets and credit quality have deteriorated in sectors with excess capacity. Policy efforts to reduce supply mismatches in the real estate sector, and to tighten nonbank credit flows, continued to weigh on non-traditional credit growth, which slowed notably during 2015. Weaker activity in manufacturing and construction have significantly impacted import demand, which contracted in the first half of 2015.

"The growth slowdown in China has been most noticeable among enterprises operating in the manufacturing and real estate sectors. Growth forecasts have been revised down to 6.9 percent in 2015 and 6.7 percent in 2016."

Chart Attribute: A. 2015 is the average of January to October.

B. Inflation is the year-on-year percent change of the Consumer Price Index. 

Source : World Bank & Haver Analytics 

"In evidence of the re-balancing of China’s economy, the share of services employment has increased, supporting real incomes and contributing to robust private consumption. A drop in equity prices and a change in exchange rate policy led to market turbulence, but foreign reserves remain plentiful and the current account is in surplus, reducing risks associated with capital outflows."

Chart Attribute: 

E. Stock market index is the Shanghai Stock Exchange Composite Index (SHCOMP). Latest observation is December 16, 2015.

 F. Foreign currency reserves is the foreign exchange holdings of the People’s Bank of China. Latest observation is 2015Q3.

Source : World Bank & Haver Analytics 

The service sector has seen its share of employment increasing in recent years, and accounted for the majority of new urban jobs created in 2015 (World Bank 2015a). This helped offset stagnant hiring in shrinking industrial sectors, and kept urban labor markets tight. Wages and real incomes have continued to increase, albeit at lower rates, contributing to sustained growth of private consumption. A continued re-balancing from industry to services should support the shift from investment to consumption, whose share in GDP is gradually recovering from a post-crisis dip.

Policies became more supportive throughout the course of 2015, in order to counter slowing activity. The People’s Bank of China (PBOC) continued to lower benchmark interest rates and required reserve ratios, while implementing new collateral policies to facilitate refinancing for commercial banks. The central bank also continued to inject liquidity into the financial system, especially during the June stock market correction. The fiscal deficit widened to a six-year high of 2.3 percent of GDP in 2015, reflecting accelerated infrastructure investment by the central government in the second half of the year. The increase in central government spending more than offset cutbacks at the local government level resulting from lower revenues due to falling land sales, restrictions imposed on borrowing through Local Government Financing Vehicles (LGFV), and other off-budget transactions.

To foster greater exchange rate flexibility, the PBOC introduced a change in the calculation of the renminbi reference rate on August 10. This led to an almost 3 percent depreciation against the U.S. dollar, the largest three-day drop since the mid-1990s. The change was implemented against a backdrop of accelerated capital outflows and slowing growth. While it sparked some market volatility in the short term, the decision was fully aligned with the objective of allowing market forces to play a greater role in the economy. With this exception, the renminbi has been stable throughout 2015, and has continued to appreciate in real effective terms despite strong capital outflows.

Private capital outflows have increased as capital controls have been loosened. The net outflow reflects corporate efforts to reduce net foreign currency exposures and foreign short-term debt. Currency interventions to reduce the resulting downward pressure on the renminbi contributed to an estimated US$443 billion decline in foreign currency reserves since September 2014 (11.5 percent off their peak level). The drop in reserves in August 2015, US$94 billion, was the sharpest drop on record, and partly reflected valuation effects, as well as an effort to diversify foreign assets through the purchase of gold. Notwithstanding this decline, China’s foreign exchange reserves remain substantial, at about US$3.5 trillion (or 32.8 percent of GDP).

Sources: Global Economic Prospect 2016 / Download The Report - LINK