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