By Janet Zhang
No one expected such a bad start for China.
In the first week of 2016, China's stock prices tumbled by 10%, and the entire exchange was halted twice by the newly implemented circuit-breaker mechanism. Meanwhile, China's currency depreciated by 1% against the US dollar, and the offshore rate fell by more.
This turmoil caused a financial panic. Global stock prices were dragged down, and commodity prices declined further. To calm the market, the securities regulator suspended the circuit-breaker mechanism only four days after its implementation. The People's Bank of China (PBOC) began to buy up renminbi (RMB) offshore to curb currency depreciation.
Did global markets overreact? In one sense, yes. China's economy continues to slow, but it is not on the brink of an economic or financial crisis. The slump in stock prices was largely due to a combination of factors, including trepidation over new regulations designed to speed up the pace of new listings, an expired rule on prohibiting stock sales by shareholders holding 5% or more of a listed company's equity, and the malfunctioning of the circuit-breaker system. The RMB depreciation was guided by the PBOC, as the new currency policy pegged the RMB to a basket of currencies, rather than the dollar alone.
China will release its 2015 GDP growth figure on 19 January. It is expected to fall below 7%, the slowest pace since 1991. It is widely believed that the growth rate will decelerate further this year. The most optimistic forecast came from the PBOC, the World Bank, and the Asian Development Bank, which predicted 6.7-6.8% growth for 2016. A median prediction by Consensus Forecasts was 6.5%, and UBS's forecast came in at 6.2%. By comparison, the readers of CFA Institute Financial NewsBrief were more pessimistic: More than half of the 618 respondents expect China's GDP growth to fall below 6%, and nearly 30% expect it will come in between 6% and 6.4%.
What do you expect China's GDP growth to be in 2016?
There are two main reasons behind the gloomy outlook. Weakening domestic and external demand continues to weigh on China's economy. The situation will be exacerbated by a supply-side reform, which is the main task of 2016 and includes reducing overcapacity, cutting inventory, and deleveraging. Even worse, the market plunge reflects rising doubts about the Chinese government's ability to propel growth.
Another cause of these bearish expectations: Readers may be confusing real growth with the official data. More and more people question the accuracy of China's official GDP growth figures over the last several years. Some estimate real growth is about 4% - much lower than the official 7% figure. Certainly, official growth data is influenced by political factors to some extent, but it is not as padded as some may think. As heavy industry and investment growth slowed significantly, expansion in consumption and services remained strong. And spending by Chinese tourists overseas is expected to grow 16% in 2015. Chinese tourists have led the world in expenditures since 2012.
About 13% of poll respondents think that China's economy will expand by 6.5%, the average growth target of the 13th five-year (2016-2020) plan. A top state advisor also said this target will be difficult to meet due to rising labor costs, environmental concerns, and the global slowdown. Only 5% of readers believe that China's economy could grow at or above the 6.8% predicted by the PBOC. We estimate the government will set the growth target at around 6.5% for 2016, and try to meet it.
The biggest challenge for policymakers is how to balance multiple targets: maintaining growth, implementing reform, and controlling risk. Ultimately, China needs to adopt a clear policy to forestall financial panic and preserve confidence in the government's ability to manage the economy.
Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.