logo
Plus   Neg
Share
Email

The Year That Was - China - Repositioning For Slower But Steady Growth

China Flag 122915

The year 2015 was one of transformation and rejuvenation for the Chinese economy as it adjusted itself to slower rates of expansion, envisaged as "the new normal", after decades of hyper-growth and positioned itself as one of the leading players in the global economy. 

External, Homegrown Problems Abound

The Chinese government shifted its policy focus from boosting exports to supporting domestic consumption and services, partly due to weaker demand from emerging markets that used to claim a significant share of the country's exports. 

Other major economic problems faced by the Chinese government include weak demand, factory overcapacity, high debt levels and investment slowdown. 

The Chinese stock market initially did not take kindly to the slowdown in the economy. By mid-year, China was witnessing a stock market meltdown that prompted authorities to take action, which failed miserably. 

After gaining a whopping 52.87 percent in 2014, the Shanghai Composite Index, the key stock market gauge, bullied its way up and hit a fresh 7-1/2 year high of 5,166 by the middle of 2015. Subsequently, it was a downhill, as the average reached the year's low of 2,927 by August 26th, down 43 percent from the June 12th multi-year highs.

Stepping Up Policy Actions

The government efforts included central bank interest rate cuts, a ban on IPOs and short-selling, and arrest of traders and even some financial journalists who gave bad press. The measures were also aimed to safeguard the government's reputation for supporting growth and to dispel notions that the economy was heading for a hard landing.

As the rebalancing continues, the Chinese economy is having a moderate recovery and expansion will average about 5 percent in the next five years, the government maintains. 

The People's Bank of China was also on its toes this year and lowered interest rates six times since November last year amid the slowdown in growth and the stock market rout. The latest reduction took place on October 23, with the one-year lending rate and deposit rate currently at 4.35 percent and 1.50 percent, respectively. 

The central bank also lowered the reserve requirement ratio several times this year, and scrapped the upper limit on the floating interest rates on deposits for some banks in its latest move to liberalize deposit rates.

The PBoC has forecast the growth rate to ease to 6.8 percent the next year and sees the number of positive factors to gradually increase. The growth rate for this year is estimated to be 6.9 percent, which is slightly below the official target of about 7 percent.

The IMF expects only 6.3 percent growth for China in 2016 compared to an estimated 6.8 percent this year. Economic growth for the third quarter of 2015 eased to 6.9 percent from 7 percent in the previous three months.

The good news for China came towards the end of the year. 

Long Wait for SDR Inclusion Ends

China had to wait till the end of November to claim its moment of glory this year, when the International Monetary Fund announced the inclusion of the renminbi, or the yuan, as the fifth currency in its Special Drawing Rights basket, awarding it the coveted "reserve currency" status. 

The yuan will be included in the basket effective October 1, 2016 and will carry 10.92 percent weight, which is in excess of those enjoyed by the Japanese yen and the British pound.

In a step to make the exchange rate of the yuan more market-determined, the PBoC had devalued the currency by the most in two decades in August, terming it as one-time adjustment. The move caused the currency to log its biggest one-day loss since 1994, when the official renminbi rate was unified with market rates.

Pioneering AIIB

In yet another step in boosting its global stature, China this year took the lead in establishing the Asian Infrastructure Investment Bank (AIIB) that aims to provide financial support for infrastructure construction in the Asia-Pacific region. 

The AIIB, which is headquartered in Beijing and has 57 prospective founding members, was formally established on December 25 and is set to launch operation in January. First proposed by China in 2013, the institution is seen as a rival for the IMF, the World Bank and the Asian Development Bank.

Scrapping 1-Child Policy

In other significant news for the Chinese economy, the government abandoned the three-decade long controversial one-child policy as the country grapples with a deepening demographic crisis that has thrown up challenges of a shrinking workforce and aging population. The government unveiled a two-child policy on December 28, which will come into effect at the start of next year. 

Way Forward

Going forward, China will increasingly focus on making growth sustainable as economic expansion rates have begun to stabilize around moderate levels. Now that the country's economic status has been successfully lifted from low-income to middle-income, efforts will be channeled to attain the next milestone of high-income, which according to economists, will be more difficult.

The government is also dealing with the undesirable side-effects of rapid economic growth such as heavy pollution of air and water, inequality, external imbalances and the widening rural-urban gap. Poverty reduction will remain a main challenge for many years as China has the second largest number of poor in the world. Efforts have already begun to tackle demographic issues such as an aging population and a possible labor force shrinkage in the long run.

Capital Economics' Andrew Kenningham expects the Chinese economy to pick up next year. The economist, who sees more monetary stimulus in the pipeline, rejected the fears of a back-door currency devaluation as "misplaced".

"The People's Bank is likely to keep the renminbi broadly stable in trade-weighted terms," Kenningham said. "Given our forecasts for other currencies, this would mean a small depreciation against the dollar and appreciation against the euro."

Analysts at Danske Bank said China's external balances remain healthy and the current account surplus is set to increase to around 3 percent of GDP due to large terms of trade gains from lower commodity prices. "In our view China still has the policy tools and flexibility to avoid a hard landing despite the substantial credit growth in recent years," they said.

"The slowdown in China, however, is felt as a hard landing in many parts of the world as growth is now driven by less import intensive sectors."

For comments and feedback contact: editorial@rttnews.com

Economic News

What parts of the world are seeing the best (and worst) economic performances lately? Click here to check out our Econ Scorecard and find out! See up-to-the-moment rankings for the best and worst performers in GDP, unemployment rate, inflation and much more.

Follow RTT