Schroders Quickview: China growth slows as stimulus effects fade
Chinese GDP came in below market expectations, but in line with our forecast, at 6.8% year on year in the final quarter of 2015. This brings 2015 growth to 6.9%, in line with the official target of “around 7% growth”, but highlights the challenges faced by the authorities in propping up growth.
19 January 2016
Stockmarket slowdown sees services suffer
The breakdown of the data is so far limited, but the slight slowdown compared to the third quarter’s 6.9% growth looks to have been driven by the services sector, with tertiary industry growth slowing from 8.4% to 8.3% in real terms.
We believe, and official comments suggest, that this is likely to be the financial sector beginning to slow as the stockmarket cools and base effects begin to weigh on what has been a very growth supportive area of the economy.
A stronger negative base effect will see this drag increase in the first half of 2016.
Higher frequency data in December, exports aside, was weaker than in November.
There will be some distortions due to pollution-related shutdowns, which could account for some of the softer industrial production number, but the weaker investment numbers seem linked to slower funding growth and reflect the challenges faced by the central bank in trying to maintain accommodative monetary policy whilst defending the currency.
More rate cuts immenant?
Intervention to prevent depreciation tightens domestic monetary conditions and so runs counter to the rate cuts implemented in 2015.
We had not expected the effects of stimulus to fade quite so soon, and expect December’s weaker data to prompt further rate and reserve ratio cuts in the first quarter of 2016 (of 35 and 100 basis points respectively), particularly if intervention proves successful in stemming capital outflows.
An increase in the fiscal deficit has already been mooted, and an actual number should be provided in March’s National People’s Congress session.
Central government may find itself needing to provide more support at the local level to boost investment figures given a weaker lending environment.
We expect a further fall in growth in the first quarter, to around 6.5% year on year, as the financial sector base effect begins to exert a larger drag.
To complicate matters, we now enter the period of lunar new year distortions on data, so it will be March before we have a reliable picture of how first quarter activity is progressing.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.