Q3: What do you think will be the main prob­lem with China’s econ­omy in 2016?

China Daily (Canada) - - DEPTH -

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

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