China’s Economic Growth in 2015 Is Slowest in 25 Years

Jan 21, 2016

 

GDP grew 6.9% in 2015; economists, Chinese officials, project a tougher year ahead

China recorded a pronounced deceleration in growth last year, affirming that a multiyear slowdown is biting the world’s second-largest economy harder and shows little sign of abating.

The growth rate, released by the government on Tuesday, moderated to 6.8% for the fourth quarter and 6.9% for 2015. The annual pace was the weakest in a quarter century, and the quarterly level undershot market expectations, posting its lowest reading since the financial crisis and signaling weakening economic momentum.

Tuesday’s figures put a grade on a tumultuous year that saw the slowdown’s impact spill over to global markets and batter the government’s reputation for competent economic management.

Chinese leaders held an economic policy meeting Monday with senior officials. While state media accounts projected a tone of determined optimism, President Xi Jinping also urged the officials “to stabilize short-term growth.” Premier Li Keqiang talked of “increasing downward pressure” on the economy, complicated by slack global demand.

“The real economy basically hasn’t picked up very well,” said Nomura Group economist Yang Zhao. “We’re going to have a choppier sea ahead of us.”

With growing debt and too much housing and factory capacity, economists—and even Chinese officials—project a tougher year ahead. The stock markets have stumbled into the new year, erasing gains from an unsteady recovery after a summertime crash. And, economists said, the tools the government has traditionally used to revive growth—infrastructure spending, easy credit and ramped-up exports—appear increasingly ineffective.

The 2015 growth rate reported by the government’s statistics bureau was down from the 7.3% gain reported in 2014. Doubts have been raised about the reliability of China’s economic data, though, and 2015’s reported rate sparked renewed concern that growth is slowing faster than the government is saying.

“China’s reported growth rate for 2015 raises many questions rather than providing full reassurance about the economy’s true growth momentum,” said Eswar Prasad, a professor of trade policy at Cornell University and the former head of the International Monetary Fund’s China division.

Fears over slowing momentum in China and Beijing’s handling of the economy have combined with concerns over plunging oil and commodity prices to pull down nervy global stock markets since the start of 2016.

Wang Baoan, the head of the National Statistics Bureau, told reporters that China’s economic data was “valid and reliable” and its methodology “in line with global standards.” Mr. Wang said that economic growth last year met the government’s target for medium-to-high growth. He considered the rate hard-earned given that global trade is shaky and markets are volatile.

“The 6.9% figure is not very low,” Mr. Wang said at a media briefing on the data.

Other data released Tuesday traced the deepening slowdown. Value-added industrial output rose a less-than-expected 5.9% in December compared with a year earlier, slowing from 6.2% growth in November. Fixed asset investment in nonrural areas climbed 10.0% last year, compared with an increase of 10.2% for the first 11 months of the year. Retail sales, a bright spot in the economy, grew 11.1% in December from a year earlier, a tick down from November’s 11.2% increase.

In the downturn, China’s economy has diverged along two tracks, with the industries that powered it for so long getting hit harder while services and household consumption power ahead. Service industries last year managed to absorb job losses from manufacturing.

The trend to greater reliance on consumption rather than investment and industry is one the government has long said it wants to encourage. Mr. Wang, the statistics chief, said that transition is expected to make progress this year.

But as growth sputters further and the government’s ability to prop it up flags, economists and Chinese officials expect more companies to get hit and layoffs to rise.

Guo Xiaogang, a deliveryman for an online store, said competition in Internet commerce has become so intense that he has fewer packages to deliver by electric cart—and a harder time making a decent wage. “Of course I’m concerned,” said the 32-year-old, wearing a red uniform and standing in western Beijing. “If I change jobs, maybe I can afford to buy more, but right now it’s not really possible.”

With the gloomier outlook, Chinese officials have said the government is looking to increase deficit spending this year to generate growth, even if that tactic has limits. Higher spending on infrastructure last year showed signs of kicking in as investment levels grew faster after lending in November and December increased, and the government is expected to spend more heavily on infrastructure this year, but the upturn may be short lived given that investment figures showed weakening in December.

“This raises the question of how sustainable the policy impact is,” said J.P. Morgan Chase & Co. economist Haibin Zhu. “It’s not sustainable.”

Economists add that the economic benefits are weaker than in previous years given the continuing drag from factory investment and diminished investment returns. Other sources of recent growth are also unlikely to come to the economy’s aid.

China’s stock market gyrations last year—a massive run-up followed by the spectacular plummet—provided a growth dividend in financial services, adding an estimated 1.5 percentage points in the first three quarters of the year, according to economists. Brokerage activity, however, has been significantly lower.

Exports, which accounted for 34.9% of the economy in 2007 but only 22.6% as of 2014, according to the World Bank, aren’t likely to produce a kick, given slack demand from developed economies.

Debt, which economists said has continued to rise even as the economy slows, is limiting Beijing’s room to maneuver. State-owned enterprises saw profits fall 9.5% year over year during the first 11 months of 2015, while their debt increased 18.2%, BMI Research Corp. said.

Total debt equals almost 260% of annual economic output, UBS Group AG estimates, up from less than 160% in 2007. While the official ratio of nonperforming loans in China’s banks remained low at 1.6% by the end of the third quarter, analysts and economists said the pace is picking up and many debts are hidden in the books of nonbank lenders while banks roll over many loans.

“If the authorities engage in the ‘extend and pretend’ game, which we expect, this implies a lack of productive investment in China over the coming years,” said Commerzbank economist Zhou Hao.

Increasingly, new lending is being used to service debt rather than fund new ventures and energy-saving technologies. Households and companies now spend the equivalent of 20% of GDP on interest payments, more than the U.S., Japan or the U.K. and equal to Korea, said research firm Gavekal Dragonomics, citing figures from the Bank for International Settlements.

As the economy slows and the yuan weakens, Chinese are moving their money out of the country, contributing to a loss in investment.

Beijing finds itself in a dilemma: if the government cuts interest rates, more capital flees. If it raises interest rates, more debt-plagued companies risk going bust, fueling joblessness.

“The real challenge is how you reduce the size of nonperforming industry without a real sharp deterioration in the labor market,” said Société Générale CIB economist Klaus Baader. “That’s the real trick.”

 

Source:  Wall Street Journal