This substantial stimulus package has been a response to the sharp slowdown in Chinese economic growth that began in late 2014 and continued throughout 2015. A certain amount of moderation in the pace of growth is to be expected as the country rebalances away from industrial and export-led activity towards services and consumption led growth, but the slowdown has been far beyond that implied by rebalancing. While not obvious from the (widely mistrusted) headline GDP figures – which show growth moderating only very slightly, from 7.2% in 2014 to 6.9% in 2015 – other measures show activity slowing sharply in China over the past year. For example, industrial production declined by 2.0% and imports fell by 14.2% in 2015. We estimate that economic growth may have dipped as low as 5.0% last year.
In the first few months of 2016, however, there appears to have been something of a turnaround. The Purchasing Managers’ Indices, which are survey-based measures of activity, have picked up; inflation has strengthened; and our own activity proxy has rebounded sharply. Indeed, after a long period tracking below the official GDP numbers, we believe economic growth may actually be above the official measure.
Market Realist – Stimulus package is bearing fruit
Over the past few years, China’s economic growth witnessed a significant slowdown. In the first quarter, the economy fell to 6.7%—the slowest pace since the global (VEU) (IEFA) financial crisis. The slowdown was mainly due to shifting in the Chinese (FXI) (MCHI) economy from investment and manufacturing-led growth to a consumption and services-driven economy.
Analysis by McKinsey showed that private consumption (IYC) contributed 27% to China’s GDP (gross domestic product) during 2000–2010. McKinsey expects the share of private consumption to increase to 41% during 2010–2020. It will likely reach 51% during 2020–2030. In contrast, the share of investment is expected to fall from 53% during 2000–2010 to 34% during 2020–2030.
Slowing industrial production and exports
Although the GDP growth hasn’t declined sharply, other economic indicators like industrial production, investment, and trade activity showed a sharp decline. In April 2016, China’s industrial production rose 6% YoY (year-over-year)—compared to 6.8% in March. It was below Market forecasts of 6.5% growth. Similarly, exports fell 2% in April—compared to the same period last year. Imports fell 11%—the 18th consecutive month of decline. The drop in imports indicates weak domestic demand.
Is a turnaround in sight?
Although some indicators suggest slowing economic growth, others indicate stabilization in economic activities. The Caixin China Services PMI (purchasing managers’ index) stood at 51.8 in April and 52.2 in March. It was better than its recent all-time low of 50 in July 2014. An index above 50 shows growing activities. The Caixin Manufacturing PMI stood at 49.4 in April and 49.7 in March—the highest during the last ten months.
Similarly, consumer prices in China rose 2.3% YoY in April—up for a third consecutive month. Food prices increased 7.4% while non-food rose at a slower pace of 1.1%. In view of the rise in inflationary expectations, the central bank might keep interest rates unchanged during its next policy meeting.
The above data suggest that the economy might have a turnaround in sight. It’s on the verge of stabilization.