GDP no panacea for China

China's below forecast (but still impressive) gross domestic product figures are unlikely to still beating hearts in China which will continue to see heightened levels of market anxiety caused by RMB depreciation, capital flight and equity volatility.


" China's financial market risks and volatilities are unlikely to diminish in 2016 even as the government has stepped up its interventions by using administrative and capital control measures."
Li-Gang Liu, Chief economist for greater China, ANZ

China's latest, more-or-less expected, 2015 GDP growth of 6.9 per cent was slightly below the 7 per cent target. The GDP and other key data such as investment, retail sales and next exports tell us the economy continues to slow while there are also signs of ongoing economic rebalancing. ANZ expects Chinese growth to bottom out at 6 per cent by 2017.

China's financial market risks and volatilities are unlikely to diminish in 2016 even as the government has stepped up its interventions by using administrative and capital control measures to stabilise its currency and markets.

China's financial risks have come to the fore as the country is liberalising its capital account while engaging in fast domestic financial liberalisation.

These liberalisation measures are being carried out on top of a debt-deflation economic cycle. Thus, economic uncertainty will only increase. During the process, traditional fiscal and monetary policy will only help mitigate the pace of the slowdown rather than change its course.


Despite the volatility, China's transition to a more normal services oriented economy is still evident. The service sector is now more than 50 per cent of GDP and has grown faster than the manufacturing sector.

Indeed, the service sector contributed 4.19 percentage points to GDP growth in 2015, against 2.43 points and 0.35 points by the secondary and primary sector, respectively. Notably, consumption contributed 66.4 per cent to GDP growth in the same period.

While people will continue to doubt whether 6.9 per cent GDP growth accurately reflects China's economic reality, a growth range at 6 per cent to 7 per cent for an economy of more than $US10 trillion is still an impressive figure.

It suggests China still contributes around 25 per cent of global growth this year and Chinese demand for resources measured in volume terms remains substantial.

China's transition to a service dominated and consumption-led economy means it will continue to be the largest export market for many economies in the Asia Pacific region.


ANZ Research predicts that China's growth will slow to 6.4 per cent in 2016 before bottoming out in the aforementioned 2017. A gradual rebound in growth could start in 2018, together with an upward property market cycle and political business cycle.

Such a forecast is predicated on an important assumption: that the government will take decisive measures to tackle the highly indebted corporate and local government sectors in the coming two years.

This means accelerating structural reforms is more important than designing smart plans to stimulate short-term growth further. Failing to address the severe economic imbalances head on, China runs the risk of falling into a middle income trap led by protracted economic stagnation.

On the back of the recent RMB devaluation and China’s market gyrations, on February 2 ANZ will host a webinar with senior economist Raymond Yeung on China’s ‘new normal’, concerns about the nation’s further slowdown and rising financial risks. You can find more information and register for the webinar FREE here.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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