Q3: What do you think will be the main problem with China’s economy in 2016?
Deputy chief economist, AIG, in New York
We expect China’s economic growth to be about 6.5 percent over the next two years, down from the expected 6.8 percent in 2015.
While China still faces a long process of unwinding overcapacity in the industrial sector, a relatively fast expansion in the services sector is likely to be sustained. The resilient services sector will help put a floor under China’s economic growth.
Rapid credit expansion remains the major risk to the Chinese economy. Credit to the nonfinancial private sector continues to expand, now at 195 percent of GDP in Q2 this year, up from 184 percent a year before. The increase is mainly concentrated in the corporate sector (159 percent of GDP), while that for households remains largely stable (about 36 percent). To be fair, credit growth also has slowed down over the past few years, but it still outstripped nominal GDP growth. The problem is that it is getting increasingly more difficult to boost growth with credit expansion. Nominal GDP per unit of new credit has been declining since 2005. Credit has to grow faster than GDP in order to stabilize the economy. We expect continuous increases in the debt-to-GDP ratio and rising non-performing loans next year.
Professor of economics, California State University Channel Islands, in Camarillo, California
Overall growth will be 6 percent with the first half stronger than the second half.
The first half will benefit from recent easing moves by the PBOC in 2015. The drop in investment including real estate and infrastructure should stabilize somewhat as land sales will increase, allowing local governments to increase spending. During the second half, the benefits from PBOC easing and land sales will peter out. More government stimulus will be needed to keep economic growth on a stable trajectory.
The overall economic growth rate does not tell the whole story. Rebalancing of the economy is well on its way. Industrial production is de-emphasized in favor of consumption. The service component of consumption is rising nicely even though it is hard to measure. Migration from rural to smaller cities is progressing, ultimately boosting consumption including healthcare, education, social services, etc. However, there are challenges. The economy is getting more leveraged as individuals, businesses and local governments increase debt. As the leverage ratio rises, there is a greater likelihood of volatility in the economy and the financial markets. The SOEs, which include many ``zombie companies’’, will continue to be a major challenge. The zombies take precious resources away from efficient companies, create excess capacity and reduce the economy’s overall productivity and growth. It will be interesting to see how rapidly the government will tackle the structural problems.
Contact the writer at paulwelitzkin@chinadailyusa. com