Stronger growth in China has its downsides
Chinese GDP growth was stronger in Q4, but there are few signs of the promised rebalancing of the economy.
20 January 2017
The final quarter of 2016 capped the year with a slight acceleration in growth, despite apparent policy tightening. Though slower than 2015, growth of 6.8% in the final quarter saw 2016 growth come in at 6.7%, well within the tolerance of the official target.
Compared to our expectations before the year began, when policy discussions were full of talk about reducing spare capacity and containing excesses, it is fair to say this has come as a surprise.
“Old economy” has accelerated
Though a positive surprise in terms of growth, it is not an unalloyed good. A breakdown of GDP shows that growth was supported in the final quarter by investment, as consumption’s contribution declined. On an industry basis, the primary sector, or “Old China”, has been accelerating for much of the year. Neither of these facts fits with the supposed rebalancing of the economy.
One potential positive here has been the growing contribution of the tertiary sector, but even here it seems likely that this is more cloud than silver lining, given the booming property market.
Investment has been state-driven
Investment of course is not always wasteful, and even in a service-driven economy it is an important part of the growth mix. But in China’s case, the data has shown that for much of the year it has been the state, rather than the private sector, driving the investment figures.
It is true that in the final quarter of the year, investment growth appears to have been focused in property and manufacturing, rather than state-led infrastructure.
It is also true that some of this is likely to be productive investment; rising global and producer prices should prompt investment by manufacturers. But the revival here also coincides with an easing of production restrictions in coal. If spare capacity reduction efforts are made in earnest, we have doubts over the sustainability of this growth.
Modest growth slowdown likely in 2017
Looking ahead, a slowdown in 2017 seems likely, but its scope will be modest. Credit growth in China has only recently slowed, and even then only marginally. It will be at least another quarter before this feeds through to activity.
We are sceptical that real cuts to spare capacity industries will be undertaken ahead of the Party congress towards the end of 2017, given the importance of the event to President Xi.
That we expect a slowdown at all reflects recent policymaker statements on the need for stability over growth, but we have heard these noises before and seen only the slightest of course corrections.
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.