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.
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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.