China’s Economic Stability Good Sign for Vulnerable Global Economy

China will easily meet its growth target of 6.5% to 7% this year, a welcome sign for a global economy struggling to regain momentum in the wake of the financial crisis.

chinaXinhua News Agency, the official press agency of the People’s Republic of China, recently described the global economy as “weak and vulnerable.” Against this backdrop, a stabilizing Chinese economy will take some of the pressure off the global marketplace.[1]

Despite the “troublesome start” to 2016, China’s economic fortunes appear to have turned around, culminating in three consecutive quarters of steady economic growth. Gross domestic product (GDP) expanded at an annualized 6.7% in the first three quarters of 2016, higher than estimates forecasting a faster cool down in the world’s second-largest economy.

chinaXinhua added that maintaining stable growth for China in 2017 wouldn’t be easy, “given persistently weak external demand, ongoing deleveraging and capacity-reduction, and a slowing property sector.”[2]
An overheating property sector has forced the government take its foot off the stimulus pedal, and shift its focus on reining in a potential speculative bubble. This appears to have weighed on economic growth in the final month of 2016.

China’s official manufacturing purchasing managers’ index (PMI) slowed faster than expected in December, the National Bureau of Statistics reported on New Year day. A separate measure of service activity also slowed faster than expected.[3]

In its October outlook report, the International Monetary Fund (IMF) forecast the Chinese economy to expand just 6.6% in 2016, slower than the previous year’s 6.9% rate that was also the slowest in 25 years.[4] The international lending institution expects growth to slow to 6.2% in 2017, as China’s economic transition continues.[5]

chinaDespite its recent stability, China’s economy faces a myriad of challenges tied to overcapacity, weak international demand and capital flight. The country’s foreign exchange reserves declined by roughly 8% in the year through November as the yuan renminbi weakened 6% against the US dollar.[6] The Chinese currency  may be expected to face stronger headwinds in 2017 as the US dollar continues to strengthen in the shadow of multiple rate hikes by the Federal Reserve. These trends have forced Chinese investors into new markets ranging from property to bitcoin to hedge against yuan instability.

Capital flight from mainland China has triggered intense bouts of volatility in the financial markets. China was the centre of the “Black Monday” market crash of August 2015 and the eventual bear market turn at the start of 2016. There is reason to believe that Chinese markets may continue to stoke uncertainty in the financial markets for the foreseeable future.

China’s economic slowdown is an inevitable symptom of a country transitioning away from industrial production toward consumption and services. The transition has been slow and painful, with Beijing forced to rely on traditional growth drivers to maintain its competitiveness. These drivers include massive debt and “smokestack” industries that made China one of the world’s most competitive economies. This was evident in the first half of 2016, where growth was fueled in large part by credit.

While China’s days of runaway growth may be winding down, very few emerging economies are growing at anywhere near the same pace. In fact, India is the only major economy outpacing China in terms of GDP growth. This trend may be expected to continue for the foreseeable future.

Against this backdrop, the global economy needs China “more than ever,” Xinhua said.[7] This is most evident in the two-plus year collapse in oil prices, which was partially driven by slowing demand in the world’s second-largest economy.

 

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[1] Reuters (December 26, 2016). “China’s growth ‘reassuring’ for ‘weak and vulnerable’ global economy: Xinhua.”

[2] Reuters (December 26, 2016). “China’s growth ‘reassuring’ for ‘weak and vulnerable’ global economy: Xinhua.”

[3] Sam Bourgi (January 1, 2017). “Growth in Chinese Manufacturing, Services Slows in December, Official PMI Data Show.” Economic Calendar.

[4] Mark Magnier (January 19, 2016). “China’s Economic Growth in 2015 Is Slowest in 25 Years.” The Wall Street Journal.

[5] International Monetary Fund (October 2015). World Economic Outlook: Subdued Demand, Symptoms and Remedies.”

[6] Sam Bourgi (December 31, 2016). “BTC/USD: Bitcoin prices Up 58% in Fourth Quarter as Bull Run Continues.” Economic Calendar.

[7] Reuters (December 26, 2016). “China’s growth ‘reassuring’ for ‘weak and vulnerable’ global economy: Xinhua.”

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