Beyond The Pessimism: Why Sustained, Healthy Development Will Be The New Normal For China's Economy

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by: G.Bin Zhao

Summary

Although the economy will continue to face downward pressure in 2016, it is important to understand that it is at a historical developmental stage of transition.

Historical experience and the laws of development have determined that the Chinese economy must slow down.

Although the economy is slowing, I firmly believe it will transform to a situation in which the overall trend is sustained, stable and healthy development over the next few years.

In the first week of 2016, the Shanghai stock market welcomed in the new year by twice triggering the recently implemented circuit breaker mechanism, a regulatory tool designed to calm tumbling markets. On the first trading day of the second week, the market continued to plunge, this time by more than 5 percent. The bad news from China's stock market not only made headlines in the world's major financial media, it also led to declines in almost all the major markets around the world. The panic among global investors is even more serious.

The stock market crash has led to declines in almost all the major markets around the world and sent global investors into a panic. How should we react to such a critical situation? How will the Chinese economy develop?

First, although the economy will continue to face downward pressure in 2016, it is important to understand that it is at a historical developmental stage of transition, shifting from rapid to moderate growth. During this transition, unusual events will inevitably occur. Many who are pessimistic about the future of the Chinese economy do not fully understand the laws of economic growth during periods of adjustment, nor are they aware of the bigger trends.

It should be expected that double-digit growth will become a thing of the past, given that, for instance, large-scale infrastructure construction has matured, the real estate market is saturated and even oversupplied, and the economy has entered an era of post-industrialization. A slowdown in growth rates is an inevitable part of the development process.

Second, the economy is no longer in need of double-digit growth; the almost 40 years of sustained high-speed economic development since the reform and opening up period has led it to a stage where it is due for a transformation. In the past few years, economic development has been too fast, overheating the general economy and bringing about great challenges such as serious environmental degradation, increasing social conflict, international pressure, and so on. During the past few years, economic development has been too fast, overheating the general economy and bringing with it major challenges.

At the same time, the country's environment, resources, labour and land cannot continue to bear the weight of such a massive and crude expansion. Thus, an economic transformation and upgrade is unavoidable.

Third, historical experience and the laws of development have determined that the Chinese economy must slow down; more importantly, the central government clearly understands these laws and uses them to its advantage when outlining relevant policies and regulations, so it is almost certain that the economy will enter a "new normal" situation.

In a policy-oriented economy, government actions are powerful forces for growth. The official growth target was set at no lower than 6.5 percent, which not only has symbolic meaning but is a scale that measures the development level across all industries.

The Chinese economy as a whole is likely to continue last year's trend during 2016, although a pessimistic forecast estimated that the GDP growth rate would more likely be lower than that of 2015. In fact, Beijing recently announced that the next five-year growth target would be no lower than 6.5 percent; in 2015, the lowest growth rate was 6.9 percent, in the third quarter, so there is still a certain amount of room to maneuver.

The world economic recovery is weak. China's real estate industry is in the doldrums. Many industries still face overcapacity and pressure to reduce inventories, total profits for industrial enterprises have decreased and the number of enterprises suffering losses has increasedm, and local government debt continues to go up. Clearly, a number of these adverse factors make for a pessimistic overall economic situation in 2016.

Although the economy is slowing, I firmly believe it will transform to a situation in which the overall trend of sustained, stable and healthy development over the next few years will be the new normal. The current adjustments will lay a solid foundation for future long-term sustainable development. For example, a number of reforms have been initiated to promote a more market-oriented economy, more transparent governance, fairer law enforcement and a more equitable society.

These measures will correct the bold and sometimes even barbaric style of economic and social expansion that took place in the past few decades.

Back to the Chinese stock market; several months after experiencing a roller-coaster-style slump last summer, the Shanghai Composite Index rebounded by about 20 percent, but only one week after entering 2016, it fell back to around the 3,000 mark again. There are multiple reasons for the ongoing crashes, but the core problem may be that investors are pessimistic about growth in 2016, and in terms of the timing, the approach of the Lunar New Year means many are eager to cash in.

Based on reports from the Central Economic Work Conference last month, growth in 2016 will probably be higher than many data-based predictions, given the big policy changes that may well be on the way. The conference identified five major policy goals -- cutting industrial capacity, lowering corporate costs, reducing property inventories, deleveraging, and improving weak links.

Among these, lowering corporate costs should see more proactive fiscal policies taking effect, and the government will incur some deficits to cut taxes for businesses. The goal of reducing property inventories may see a relaxation of the real estate regulations that have lasted for several years, to help reduce the glut.

In addition, monetary policy may also be more lenient. There is still room for downward adjustments in the deposit reserve ratio, and the central bank may continue to cut interest rates. Some people worry that a cut in interest rates may trigger a large-scale outflow of hot money, leading to instability in the exchange rate.

I believe that since the majority of market participants think China's economic slowdown and the continued depreciation of the renminbi are now the trend, the central bank will only need to guard against financial risks that will cause exchange rate fluctuations, and it will gradually or very soon allow the market to decide the actual exchange rate; in this way, it can also promote the renminbi market-oriented exchange rate formation mechanism.

Undoubtedly, many people, including investors, continue to dwell on the past of double-digit growth, a mental state that causes them to mistakenly think that 6.5 per cent represents an era of economic depression.

At 3,000 points, the Shanghai Composite Index has distorted the value of many companies, and far-sighted investors should chuckle, since the beginning of 2016 has seen opportunities unfold everywhere.

(Source: South China Morning Post)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.