China announced the full-year results of a number of key economic indicators for 2015 (see Table 1). While some of these indicators have fallen short of targets laid out in March 2015, the combination of lower-than-expected inflation, robust growth of the tertiary sector, and improved trade surplus has helped stabilize the economy and kept its headline growth rate intact. Although we do not expect any V-shape growth rebound in 2016, a more proactive approach of fiscal spending and effects of expansionary monetary measures should help stabilize the Chinese economy.
Rising importance of the tertiary sector
China’s economy grew 6.9%YoY in real terms during 2015. As CPI averaged 1.4%YoY throughout the year – the lowest level since 2009 – the low inflationary environment has allowed real GDP growth to gently slow.
As noted in our previous update on 20 October, the expanding tertiary sector continues to support the economy. With the rapid development of the financial services sector in 2015 the tertiary industry carried the economy by growing 11.7%YoY during the year, and compensated for the lacklustre primary (+4.3%YoY) and secondary (0.9%YoY) sectors. As a whole, the tertiary sector now represents some 50.5% of the Chinese economy (48.1% in 2014), as compared to the secondary (40.5% of GDP in 2015 vs. 42.7% in 2014) and primary (9 % of GDP in 2015 vs. 9.2% in 2014) sectors.
During the second half of 2015, the secondary industry saw stronger headwinds, resulting in a meagre 0.2%YoY growth in the third and fourth quarters respectively (see Chart 1). Such trends are expected to continue, and the manufacturing sector may see added pressure in the near term (e.g. the official Manufacturing PMI has recorded below-50 readings for five consecutive months), as China continues its steady transformation away from the labour-intensive manufacturing growth model.
Scale matters Even though the 6.9%YoY growth is notably lower that the double-digit growth rates over the past decade, and the slowest pace in 25 years, China still generated over US$700b worth of additional economic output during the year – which is similar to the scale of the Turkish economy (i.e. US$722b and the 18th largest economy in the world). According the IMF’s World Economic Outlook database released in October 2015, the Chinese economy was estimated to represent 15.5% of the world’s GDP –second only to the U.S. (24.4%) – and the share was up from the 13.4% a year ago (see Chart 2).
At the same time, China’s international trade activities declined during 2015 – exports and imports declined 2.6%YoY and 14.4%YoY, respectively, in USD term. However, the country has become an increasingly important exporter. According to WTO’s data, China’s exports represented 14.6% of global exports during the first 10 months of 2015, compared to 12.3% in 2014. These trends suggested that China’s global presence has continued to expand in 2015, despite various underlying concerns.
Conclusion HKGCC forecasts growth in 2016 to be 6.5%YoY. Also, the low inflationary environment will continue, monetary policies will stay loose, and real household income growth will pick up, partly due to the low inflationary environment.
Looking ahead, economic growth will likely continue to be moderate, while inflation should remain low in 2016 as a result of the low commodity prices. The Chinese Government has expressed repeatedly that the monetary environment will remain accommodative, while further fiscal measures (e.g. tax cuts) could be on the way. Consumption will continue to pick up as a result of the rising disposable income (+8.2%YoY in urban areas during 2015), but sales activities could continue to shift from brick and mortar outlets to online purchases given the rapid development of the latter channel. As for investment, since profitability remains low for various sectors (e.g. in October 2015, the textile industry’s net profit margin was estimated to be 5.1%), the private sector’s proclivity to invest should remain modest.
At the Annual Central Economic Work Conference, which ended on 21 December 2015, policymakers advocated supply-side reform to tackle overcapacity issues. If they are successfully carried out, profitability of industries might recover in these sectors along with investment confidence. The post-conference communiqué suggested that stronger fiscal stimuli will likely be adopted, along with continuous expansionary monetary policies. While it is unlikely that the Chinese Government will commit to mega-infrastructure spending, more and better planned publicly-funded infrastructure projects could be in store, which should revitalise the private sector’s confidence.
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