Eco­nomic data move to­ward new nor­mal

China Daily (Canada) - - FRONT PAGE -

The eco­nomic data of Jan 20 showed that, on a quar­terly ba­sis, the slow­down of China’s econ­omy was in­ter­rupted in the fourth quar­ter of 2014. How­ever, for the year as a whole, GDP growth slowed from 7.7 per­cent in 2013 to 7.4 per­cent last year, slightly be­low the of­fi­cial tar­get of 7.5 per­cent, the first time this has hap­pened since 1990.

The eco­nomic slow­down was es­pe­cially vis­i­ble in in­dus­try, par­tic­u­larly heavy in­dus­try, which was jolted by the real es­tate down­turn and where the im­pact of the slow­down on cor­po­rate ac­tiv­ity and prof­its is am­pli­fied by fall­ing out­put prices.

Ac­tiv­ity and price de­vel­op­ments in light in­dus­try and the ser­vice sec­tor were more fa­vor­able. In­deed, we (at Royal Bank of Scot­land) saw­fur­ther re­bal­anc­ing of the pat­tern of growth in 2014. As the share of the sec­ondary (in­dus­trial) sec­tor fell 1.3 per­cent­age points to 42.6 per­cent of GDP, the ser­vice sec­tor’s share in­creased 2.1 per­cent­age points to 48.2 per­cent, even though the re­bal­anc­ing on this di­men­sion was less rapid in real terms.

The rel­a­tively fa­vor­able growth of the com­par­a­tively la­bor-in­ten­sive ser­vice sec­tor sup­ported the la­bor mar­ket. With real ser­vice sec­tor GDP growth edg­ing down from 8.3 per­cent in 2013 to 8.1 per­cent last year, newur­ban job cre­ation— the gov­ern­ment’s pre­ferred la­bor-mar­ket in­di­ca­tor— was 10.7 mil­lion, ex­ceed­ing the tar­get of 10 mil­lion. Mi­grant em­ploy­ment growth— agood­indi­ca­tor on the vi­brancy of the ur­ban la­bor mar­ket— picked up slightly in the fourth quar­ter of last year, after an ear­lier slow­down.

The rel­a­tively good la­bor mar­ket per­for­mance through 2014 was an im­por­tant rea­son why China’s lead­er­ship re­mained rel­a­tively re­strained with re­gard to macroe­co­nomic stim­u­lus and a rea­son the lead­er­ship thought it ac­cept­able for growth to slightly miss the growth tar­get in 2014.

In­fla­tion faces down­ward pres­sure be­cause of fall­ing prices of raw­com­modi­ties on global mar­kets and over­ca­pac­ity in China’s in­dus­try, although the like­li­hood of a per­ni­cious de­fla­tion­ary spi­ral is not high.

Eco­nomic growth is likely to re­main un­der down­ward pres­sure in the first half of 2015, af­fected by con­tin­ued real es­tate weak­ness. In spite of mea­sures to stim­u­late hous­ing sales taken in the sec­ond half of last year, a real es­tate re­cov­ery is not likely any time soon. Although low raw­com­mod­ity prices should support mar­gins in in­dus­try, cor­po­rate in­vest­ment mo­men­tum will prob­a­bly not im­prove much ei­ther in 2015, given the weak de­mand prospects and over­ca­pac­ity in sev­eral sec­tors.

Other growth driv­ers re­main broadly in­tact, though. In­fra­struc­ture in­vest­ment should con­tinue to be sup­ported by pol­i­cy­mak­ers’ re­liance on such in­vest­ments to support growth, although the im­ple­men­ta­tion of the newlo­cal gov­ern­ment debt frame­work does pose down­side risks. Con­sump­tion should con­tinue to ben­e­fit from a solid la­bor mar­ket and low in­fla­tion, while the out­look for ex­ports is rea­son­able.

Key risks to the out­look in­clude a more pro­nounced global mon­e­tary and ex­change rate up­heaval, weaker global trade growth and, in China it­self, a more pro­nounced down­turn in real es­tate, lower in­fra­struc­ture in­vest­ment fol­low­ing the im­ple­men­ta­tion of the lo­cal gov­ern­ment debt frame­work, and jit­ters in fi­nan­cial mar­kets on the back of credit events.

Pol­icy support will be needed to achieve GDP growth of close to 7 per­cent in 2015— the likely growth tar­get for this year— but pol­i­cy­mak­ers will re­main re­luc­tant to move to­ward ma­jor, high­pro­file stim­u­lus mea­sures in line with their em­pha­sis on “the new nor­mal”, in­stead of stim­u­lus. On the fis­cal front, while in­fra­struc­ture in­vest­ment will re­main a fo­cus this year, there is no ma­jor stim­u­lus in the pipe­line.

On the mon­e­tary front, calls for pol­icy to support growth and con­tain bor­row­ing costs will be bal­anced with the need to rein in the rise in lever­age and fi­nan­cial risks. The Peo­ple’s Bank of China has largely con­tin­ued to im­ple­ment “tar­geted” mon­e­tary pol­icy mea­sures in­stead of high-pro­file mea­sures such as re­serve re­quire­ment ra­tio (RRR) or fur­ther in­ter­est rate cuts. Ear­lier this week, the PBoC in­creased re­lend­ing to fi­nan­cial in­sti­tu­tions that serve agri­cul­ture and small com­pa­nies. Another fac­tor hold­ing back an RRR cut has been large in­flows into the eq­uity mar­ket in re­cent months, in part fu­elled by mar­gin trad­ing, although mea­sures an­nounced last Fri­day by the China Bank­ing Reg­u­la­tory Com­mis­sion and China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion to rein that in seem to have had a ma­jor damp­en­ing im­pact on the stock mar­ket and may make an even­tual RRR cut more likely. The au­thor is chief China economist at the Royal Bank of Scot­land.

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