China's transition to a consumer-led growth model

Chinese growth dipped to 6.9 per cent in the third quarter, dropping below the 7 per cent mark for the first time since the global financial crisis. As growth in China continue to slow further, credit defaults will become a growing concern with the rise in levels of non-performing loans. 

China to see further fall in GDP growth in 2016

Growth is likely to resume a downtrend in 2016 on structural headwinds. Chinese authorities estimated annual average economic growth to be around 6.5% between 2016 and 2020. Nomura expects growth to slow to 5.8 per cent in 2016. The ADB and the World Bank have also slashed China’s growth forecast for 2016. Citi expects China’s economy to grow by 6.3% in 2016. Citi’s 2016 forecast is in line with that offered by the IMF in its latest world economic outlook. 

Recent data shows China’s transition to a consumer-led growth model

China’s economic activity stabilized slightly on the monetary policy easing. Consumption has picked up at a continuous pace. Retail sales growth increased to 11.0% y-o-y in October. The increase in retail sales reflects China’s economic transition to a consumer –led growth model. The government’s non-manufacturing PMI report that focused largely on the nation’s services sector, held in expansionary territory at 53.1. 

The government’s manufacturing PMI gauge, on the other hand held in contractionary territory in October, sitting at 49.8. Industrial production growth came in slightly below expectations was recorded at 5.6% y-o-y in October from 5.7% in September, slightly below expectations. 

Economic indicators depress overall sentiment

CPI inflation moderated to 1.3% y-o-y in October while PPI deflation remained unchanged at -5.9% in October. Lower prices for food and other commodities likely to keep consumer price inflation depressed in 2015. However it is likely to rebound slightly in 2016. CPI for 2016 is expected at 1.9 per cent.

The lag in the property market can be expected to further slow growth in 2016. Property investment growth in China during the first nine months slowed to 3.5 per cent. Investments will likely enter the negative territory in 2016 because of an oversupply of housing in the lower-tier cities. Fixed asset investment also weakened, its growth slowing to 10.2% y-o-y.

Exports fell 6.9 per cent and imports slipped to 18.8 per cent in October. Private and official survey also showed decline in activities in China's factory sector in October. Chinese October consumer price index (CPI) rose 1.3 per cent from a year earlier, declining further from 1.6 per cent in September. The producer prices at -5.9% YoY, below the -5.8% expected continued its fall for the 44th straight month giving rise to deflationary pressures.

Fiscal expenditure increased to 36.1% y-o-y in October while overall tax revenue growth slowed to 1.8 per cent y-o-y in October. Lower revenues will likely push the fiscal deficit above the target of 2.7% of GDP target in 2015. The budget deficit is expected to further widen in 2016 as more of local governments’ off-budget activities begin to get included in the budget. The fiscal deficit looks set to be 2.8% of GDP for 2015 instead of the budgeted 2.3%.

Post the "double cut" policy easing might slow

The central bank has cut interest rates twice this year. Though PBOC plans to continue with its accommodative policy stance, the policy easing is likely to slow. The Japanese investment bank, Nomura forecast four RRR cuts (of 50bp each) and two benchmark interest rate cuts (of 25bp each) in 2016. A faster-than-expected pace of economic rebalancing is believed to be the primary concern for China as of now. 

Read: Central banks to continue trying to achieve 2% inflation in 2016

Beijing stands against persistent depreciation. The PBOC have cut interest rates and required rate of return (RRR) to cushion devaluation impact. Beijing will continue to seek to globalize the yuan, through currency swaps as well as trade-financing facilities.

What the 13FYP has in store

At its 5th plenum the CPC pledged to rebalance the economy toward services. The principle objective of the plenum was to chart measures that would provide necessary support to help China to graduate from a middle income status by 2020. The 13th FYP which will be rolled out in 2016 plans to shift the economy from an investment-driven one to consumption-oriented. China will also focus on implementing the ‘Made in China 2025 Plan’ during its 13th FYP period. The increased participation of China in global economy will not only ensure foreign investment in China but will lead to success of Chinese enterprises on the global platform.

End of China’s one child policy will go on to significantly add to the work force by 2020-2025. The "One Belt and One Road" strategy highlighted during the meeting is expected to help in RMB internalization.

Narrowing the income gap, and building a more fair and sustainable social safety net was also agreed upon at the meeting to ensure equal income distribution.

Rebalancing and reform must go hand in hand

The Chinese policy makers are faced with a challenge of striking a balance between the need for continued growth and the imperative for reforms. Those who draft policy measures struggle to not waver on reform while still ensuring healthy numbers for all economic indicators. The challenge before the Chinese policy makers is to go through rebalancing without compromising on growth.