China’s Communist Party has published a document in which it projects slower economic growth in 2016.
Continued contraction in new real estate investment and exports means risks are tilted to the downside.
Growth may come in between 6.5 percent and 7 percent in the coming year after an expected 6.9 percent outcome in 2015.
Preventing a sharper slowdown will require continued substantial support from policymakers with more rate cuts and an expanded fiscal deficit.
The outlook on the yuan is balanced between stability and depreciation, with the latter more likely.
China’s growth appears to have bottomed out.
Bloomberg Intelligence Economics’ monthly GDP tracker shows the economy expanded 6.6 percent year on year in October — a level it has hovered around since July.
Continued stress in real estate, where a rebound in sales has yet to trigger a recovery in construction, weighs on the outlook.
So, too, does persistent weakness in exports.
Overseas sales contracted for four straight months to October.
Stabilization in growth reflects substantial policy support.
The central bank has cut interest rates six times in the past year.
Fiscal spending is accelerating. Local governments are benefiting from a 3.2 trillion yuan (US$502 billion) debt swap, helping them refinance borrowing at lower costs.
Further support on all of those fronts will be required in 2016.
With stressed corporate balance sheets limiting the effectiveness of rate cuts, fiscal policy will do more of the work.
The arguments on the yuan are finely balanced.
Contracting exports, capital outflows and a coming first rate hike from the US Federal Reserve suggest the currency should fall.
Fear of capital flight and expected inflows on the back of the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights basket suggest it will maintain an uneasy stability.
The consensus forecast is for the currency to end 2016 at 6.60 per US dollar, down from 6.36 in mid-November.
A larger drop to about 7.00 would restore export competitiveness.
China’s government has accepted a lower threshold of a 6.5 percent annual expansion in GDP in the 13th Five-Year Plan.
That doesn’t mean they’ll immediately lower the annual target.
Sticking with 7 percent for 2016 would signal confidence in China’s growth prospects and allow for lower growth toward 2020.
A 7 percent target could widen the credibility gap, with market participants skeptical of China’s official data.
The reform program will roll on. In the financial sector, interest rate liberalization has been completed.
Progress on capital account opening may accelerate given a commitment to yuan convertibility by 2020.
The 2015 equity market collapse could catalyze a rethink of financial regulation.
Implementation may bring clarity to the government’s hazy plan for the reform of state-owned enterprises.
Concerns about financial stability are well founded and will continue to grow.
Outstanding credit rose to 208 percent of GDP in September 2015 from 125 percent at the end of 2008. In 2016, it will continue to rise.
With almost all of banks’ assets and liabilities domestic and low central government debt, the chances of an imminent crisis are limited.
Corruption investigations targeting the financial sector may cause larger disturbances than deleveraging.
The views expressed in this article are those of Tom Orlik and Fielding Chen, economists at Bloomberg Intelligence
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