FXStreet (Mumbai) – China’s Q4 GDP figures will be released tomorrow and markets are tense expecting growth to further drop to 6.8 per cent, lower than the Q3 GDP growth figures. The Chinese economy had grown 6.9 per cent in the third Quarter, falling below 7 per cent for the first time since the global financial crisis. If the GDP does come in at 6.8 per cent as broadly estimated by markets, it will mark the weakest pace of expansion since 6.2 per cent growth pace seen in Q1 2009. This will bring the policy makers under pressure to opt for more easing immediately to prevent further slowdown and calm jittery investors.
Economic growth for 2015 is believed to have declined to hit 6.9 per cent from 7.3 per cent in 2014, a central bank work paper said recently. This would be the slowest pace of growth in 25 years.
The suspension of trading activities on account of sharply declining stock prices twice in the first week of trading in 2016, as well as the devaluation of yuan raised concerns about the health of the economy which has in the last few quarters shown signs of a steady slowdown. Markets everywhere had stumbled on account of plunge in China’s stock markets and the yuan.
Weak fundamentals
The Chinese economy did not have a great start to 2016. A slew of data released this month highlighted the weak fundamentals. China’s consumer inflation remained soft in December and came in at 1.6 per cent. Annual retail sales growth came in at 11.3 per cent in December. China aims to gradually transform to a consumer-led growth model.
The producer price index (PPI) continued its fall. The PPI for December stayed unchanged at -5.9 per cent in December, declining for the 46th straight month. Factory output likely grew 6.0 per cent in December from a year earlier on rising deflationary pressures which have resulted from overcapacity and softening demand. China’s foreign reserves have been declining sharply. The annual growth in fixed asset investments estimated to have eased to 10.2 per cent in 2015, marking the weakest expansion in nearly 15 years.
Caixin PMI data showed activity in China’s services sector in December expanded at its slowest rate in 17 months. The Caixin/Markit PMI dropped to 50.2 in December from 51.2 in November; the lowest reading was the lowest since July 2014. The latest PMI figures have been dismal. The Caixin manufacturing PMI fell in December to 48.2, down from 48.6 registered in November, contracting for a tenth month
Economists Qu Hongbin and Julia Wang at HSBC vua Reuters said “The weaknesses in both domestic and external demand have exacerbated the deflationary pressures in the economy,” said in a note. Going into 2016, weak domestic as well as external demand will continue to weigh on growth.”
More easing needed
Given the weak fundamentals and on the backdrop of slowdown scaring investors away, the central bank will likely need to opt for accommodative monetary policy. A loose monetary policy will help China implement structural reforms while not compromising too much on growth. The PBoC has cut interest rates six times since November 2014 and reduced banks’ reserve requirement ratios (RRR) to spur growth. However, the easing has been able to achieve if we look at the economic indicators. The central bank at its end will likely slash rate twice this year totaling 50 basis points and opt for two cuts in RRR totaling 100 basis points in the first half of 2016.
Top leaders have already declared their decision to push forward “supply-side reform” to come up with alternative growth engines. Also, they will develop measures to tackle factory overcapacity and property inventories. The government can be expected to raise the budget deficit of 2016 to about 3 per cent. An increase in tax cuts and government spending also looks likely. To achieve the goal of doubling GDP and per capita incomes by 2020 from 2010 levels, the government this year will aim to attain at least 6.5 per cent growth rate this year.
(Market News Provided by FXstreet)