03 Feb 2016
" Inevitably China faces an economic rebalancing as the country's services sector and consumption assume a bigger role."
Raymond Yeung, ANZ senior economist, Greater China
Growth in China's gross domestic product during 2015 almost met ambitious internal targets, in contrast to the poor performance of conventional monthly indicators.
Strong headline growth was underpinned by an abnormally strong performance from the financial services sector, which contributed 1.35 bips of the 6.9 per cent total growth.
With a country the size of China total GDP is always going to subject to a margin of error. Revision of estimates is completely normal and also seen sometimes in the West.
Also of note in China is the services PMI, which has stayed in expansionary zone and remains well above its 2009 level. We need to track China's non-manufacturing segment more closely and develop new indicators to serve this purpose.
Inevitably China faces an economic rebalancing as the country's services sector and consumption assume a bigger role. But it's a rebalancing which has been quietly happening already.
China's service industries have been outperforming manufacturing and net exports. The share of consumption in economic growth has also outpaced investment.
Industries already running at overcapacity issue will shrink. Imports of natural resources have already slowed as commodity prices face downward pressure.
Still, China's trade data requires further scrutiny. Cross border trade with Hong Kong sometimes involves non genuine flows for financial arbitrage. Customs data is reliable but they may not entirely reflect the state of global demand.
Reform has forced a slowdown in China's economy but growth of 6.5 per cent is hardly slow by international standard.
China's labour market remains tight but mooted layoffs should be manageable. The real issue in our view is in labour shortage, not surplus.
China is a high-saving country seeing cyclical and policy driven downturn and is still consuming. Still, rising corporate leverage and credit risks are a concern and will require ongoing deleveraging and structural reforms.
Real estate and construction is driving credit growth and concentration risk is increasing with few firms at high leverage ratios. Property prices are starting to heat up amid easing of purchase limits and the relaxation of mortgage rules.
China is not Japan. There is little basis to expect a prolonged property slump or lost decade. But property oversupply in China's third- and fourth-tier cities suggests adjustment will continue for some time.
In our view, the earliest time a full-fledged China recovery could occur is in 2018. Before then a painful transition is likely.
China's persistently high saving rate and current account surplus are the cornerstone of its economy although they do fuel global imbalance. The country's current account surplus forms the basis for its exchange-rate sustainability.
China's central bank has made clear its new stance to let the RMB be market driven. But stability still dominates the policy agenda in view of speculative pressure.
The People's Bank of China still hopes to keep the exchange rate stable. Despite recent falls the relative position of the RMB is still very high.
In our view, the PBoC 's hold on capital control should serve strictly as a stabilisation measure and not be a long-term solution.
China's leadership has placed a large emphasis on economic reform. The year has begun with a series of serious economic adjustments: deleveraging, destocking in the property sector and addressing over-capacity issues.
Urbanisation and wage growth have already boosted consumption. Spending on discretionary goods and services has increased.
The local transport, telecommunications, real estate, education and recreation are all sectors which will benefit greatly from China's rising consumption and emerging middle class.
One belt, one road is a highly strategic initiative and consistent with domestic structural change. It is a conceptual framework beyond infrastructure and may also support RMB internationalisation.
Raymond Yeung is ANZ senior economist, Greater China.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
03 Feb 2016
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