International Finance
Economy

Low GDP figures new normal for China

Economists expect the Asian economic giant to achieve economic stability in the long run Suparna Goswami Bhattacharya January 15, 2016: If the beginning of a year sets the foundation for the entire year, then 2016 will easily be a topsy turvy one especially as far as China and its effect on global markets in concerned. On the first day of trading in 2016, the Chinese...

Economists expect the Asian economic giant to achieve economic stability in the long run

Suparna Goswami Bhattacharya

January 15, 2016: If the beginning of a year sets the foundation for the entire year, then 2016 will easily be a topsy turvy one especially as far as China and its effect on global markets in concerned. On the first day of trading in 2016, the Chinese stock market tanked resulting in the suspension of equities trade nationwide for having lost almost seven per cent of its value thanks to weak manufacturing data. And this did not stop here. Trading had to be stopped for the second time in the same week on Thursday.

For some years now, the world has been monitoring China closely. After all, a lot depends on its economic performance. “There is excessive leverage, shrinking working age population — all this is bringing down the economy. We are at the bottom of the consensus, and forecast GDP growth at 5.8% this year from 6.8% in 2015,” says a report by Nomura titled ‘Asia 2016 Outlook — Choppier Seas Ahead’.

While Nomura predicted China GDP at 5.8%, IHS expects it to be around 6.3% in 2016. “Vast excess industrial capacity, financed by an explosion of debt, is the biggest threat to China’s growth prospects,” states an IHS report.  Neither the IMF’s recent inclusion of the renminbi in the SDR basket of currencies nor the change in the one-child policy is likely to have a significant impact on near-term prospects, it further adds.

The government, on its part, has more room to play with policies than most other countries. For one, it is trying to rebalance the economy away from capital investments and exports, and towards services which will have its effect in construction and manufacturing sectors. Tom Elliot, deVere Group’s International Investment Strategist, says, “The first battle is political, as networks of political and business elites that encouraged over-investment are brought to heel. This means the removal of subsidised loans and environmental laws being applied.” This, he adds, may lead to higher unemployment until the labour is re-absorbed into the service sectors of the economy. “There will also be a rise in bank loan defaults by construction and property development companies, which may curtail overall bank lending and so limit GDP growth.”

Usually, a shift to services sector is considered to generate steady and persistent demand. For instance, eating out at restaurants becomes more or less a habit while construction industry will need new projects to sustain itself.

However, the government is reluctant to launch a strong fiscal stimulus programme, as it may disrupt the transition to the services sector. “The silver lining is that growth should become more balanced as economic structure improves further, in the sense that the share of consumption and services in GDP will pick up.”

To be fair, as a country becomes richer, its growth rate has to slow. However, it is likely to be a gradual slowdown in GDP growth as sharp falls in the relatively wealthy cities and the coastal regions will be countered by much more rapid growth in the less developed centre and west of the country.

Impact of slowdown

There is a slowdown in the inward investment projects by China in Africa and South America mainly because commodity price falls and slower economic growth.

“The impact on the host countries to a slowdown in China’s FDI is difficult to judge. An unfinished infrastructure project will reduce current spending in the economy and future benefits to the country brought about by the project will have to be written off for now. These are difficult to quantify. Furthermore, railway building and mine development in Africa, for instance, has brought with it fewer externalities than might have been expected due to the importation of Chinese labourers, machinery etc,” adds Elliot.

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.