Concerns about China's policy making ability have shot to
the top of global investors' risk lists for 2016 after a renewed
plunge in its stock markets and yuan currency stoked worries that
the economy may be rapidly deteriorating.
After being a major locomotive of international growth for decades,
China is locked in the midst of a protracted slowdown, leaving the
United States as the only main driver of the global economy.
Weak exports, factory overcapacity, slowing investment, a soft
property market and high debt levels are all compounding problems
for the government as it tries to transition from a centrally
planned economy to a more market-oriented model that will require
leaders to cede a large degree of control.
Growth in fourth-quarter gross domestic product (GDP) eased as
expected to 6.8 percent from a year earlier, down from 6.9 percent
in the third quarter and the weakest pace of expansion since the
first quarter of 2009.
Full-year growth of 6.9 percent, enviable by Western standards, was
China's poorest showing in quarter of a century.
Other data on Tuesday suggested the world's second-largest economy
lost more steam in December, dashing hopes that a year-long flurry
of government stimulus would finally kick in.
That said, there were no signs of a meltdown that some traders have
Zhang Yiping, an economist at China Merchants Securities, said the
struggling property market - a major driver of demand for materials
from cement to steel - was mostly to blame for the difficulties
China is having boosting performance.
"The policy to boost the property industry conducted in 2015 hasn't
taken effect yet. I see more downward risks for China's economic
growth in 2016, and they actually look fairly severe."
Property investment rose just 1 percent, a near 7-year-low, while
new construction plunged 14 percent.
The China statistics bureau told a news conference that the 2015
growth had been "hard won", adding that the structural adjustment of
the Chinese economy is at a crucial stage.
That highlights the difficulties Beijing will face in getting policy
- be it monetary easing, reforms, increased fiscal spending or
cutting red tape - to translate into actual growth in 2016.
Premier Li Keqiang said in December the government would "take a
knife" to loss-making zombie companies as parts of efforts to reduce
overcapacity in the system, but that would require tough political
decisions such as allowing more bankruptcies and potential layoffs.
Other top priorities Beijing has announced for 2016 include
shrinking a glut of unsold homes, deleveraging balance sheets,
reducing costs for businesses and encouraging new technology.
And analysts say policymakers will need to improve their
communication with financial markets, after a heavy-handed stock
market rescue plan last summer and after the People's Bank of China
sowed confusion globally this month by allowing the yuan to weaken
sharply then intervening to stop the fall. Its intent is still not
clear, but many traders expect downward pressure on both stocks and
the yuan to persist through the year.
"In order for policy easing to have the desired impact, policy
response should be pro-active, co-ordinated and better communicated
in order to reverse the slide in private sector confidence and
stabilize financial market expectations," HSBC said in a note.
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Even if Beijing hikes spending and cuts interest rates again as
widely expected, analysts expect growth will cool further this year
to 6.5 percent.
Some China watchers believe real growth levels are already much
lower, noting output of electric power and steel fell for the first
time in decades in 2015, while rail freight dropped.
Some analysts argue that Beijing has been too cautious in lowering
rates and freeing up cash in the banking system, keeping real
interest rates too high given low returns on investment. After six
rate cuts since November 2014, China's main policy rate is still
fairly high at 4.35 percent.
WEAK END TO 2015
Other data on Tuesday suggested China's economy continued to lose
momentum late in the year, which will keep pressure on the local
stock market and feed expectations of further weakness in the yuan
as more capital flows out of the country.
On a quarter-on-quarter basis, economic growth eased to 1.6 percent
in the fourth-quarter from 1.8 percent in the third.
Industrial output rose 5.9 percent in December from a year earlier,
missing forecasts of 6.0 percent and down from November's 6.2
Growth in retail sales - one of the few bright spots in 2015 - eased
to 11.1 percent in December, less than an 11.3 percent rise expected
by the market and November's 11.2 percent.
Fixed-asset investment growth, a crucial driver of the economy, grew
10.0 percent in 2015 from the previous year, also missing market
To be sure, there are some parts of the more than $10 trillion
economy that are looking better as 2016 begins.
China's house sales and prices continued to rise in December, though
a full-blown property recovery is not expected any time soon.
On the factory side, vehicle sales are seen growing 6 percent in
2016, accelerating from last year on demand for more green cars and
sport-utility vehicles, good news for the likes of General Motors.
"Sluggish prices and efforts to reduce capacity in some industries
have dragged on industrial performance," analyst Guo Lei at Founder
Securities said in a note.
"In 2016, due to a possible bottoming out of commodities, and easing
deflation, an expected stabilization in cyclical sectors could give
some support to the economy. We expect to see some recovery after
the second quarter of this year."
(Additional reporting by Sue-lin Wong, and Lu Jianxin, Pete Sweeney
and the Shanghai newsroom; Editing by Kim Coghill)
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