Money Flowing Out of China Despite Stable GDP Growth

Executive Summary

Real GDP in China grew 6.8 percent on a year-ago basis in Q4-2016, the sixth consecutive quarter in which growth has been between 6.6 and 7.0 percent. Despite generally stable GDP growth over this period, money is clearly flowing out of China, as demonstrated by the $1 trillion decline in the government’s FX reserves since mid-2014. Not only have capital inflows softened, but Chinese companies and individuals are taking an increasing amount of money out of the country. In our view, the Chinese government will keep the depreciation of its currency “orderly”, at least for the foreseeable future, by a mixture of sales of its FX reserves and more stringent enforcement of capital controls.

Chinese Economy Has Achieved a “Soft Landing” Data released today showed that real GDP in China rose 6.8 percent on a year-over-year basis, a slight pickup from the previous quarter. This marks the sixth consecutive quarter in which the year-over-year growth rate has been between 6.6 and 7.0 percent, an indication that economic growth in China has stabilized after its marked slowdown between 2010 and 2014. A breakdown of the real GDP data into its underlying demand-side components is not readily available. However, the preliminary disaggregation of the GDP data into broad industry categories showed that growth in the “secondary” industries, which include the construction and industrial sectors, appears to have held steady around 6 percent, while growth in the “tertiary” industries, essentially the service sector, appears to have strengthened somewhat.

In that regard, the growth rate in nominal retail spending has picked up recently, but it remains well below growth rates of the past several years. Despite the strong headline GDP figure, the sharp slowdown in investment spending that has occurred this decade is the primary cause for the deceleration in the Chinese economy (Figure 2). Housing starts continue to decelerate, further evidence of a pullback in investment spending in the residential market. Although we do not foresee the Chinese economy crashing anytime soon, we anticipate a gradual slowdown with GDP growth slowing to 6.3 percent in 2017 before edging down further to 5.8 percent in 2018.

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