February Economy Report

By Andrew Smith

In mid-January, we finally got confirmation that the Chinese economy slowed down at a considerable pace in 2015. According to the latest figures, GDP grew at an annualised rate of around 6.9%, which fell slightly below the Chinese authorities' official target of 7%. It indicated slower growth than in 2014, when GDP expanded by some 7.3%.

Given that this means the Chinese economy is growing at its slowest pace for 25 years, outside observers from other major economies around the world are understandably starting to feel very nervous about the country's prospects over the coming months and years. A number of key spokespersons, from other G20 nations, have already made their feelings clear.

Chang Min, head of the research department at the Bank of Korea, said: "We consider the Chinese economy the biggest source of uncertainty for the Korean economy this year." George Osborne, the UK's chancellor of the exchequer, has become markedly more pessimistic since the start of the new year, warning that the British economy is at risk of being buffeted by a "dangerous cocktail of new threats", including slower Chinese growth, the knock-on fall in commodity prices, the recessions in Russia and Brazil, and the decline in global stock markets.

These fears have seeped across the financial markets since the start of the year. Both the yuan and the nation's leading stock indices have been on a general downward trend. So far we have already seen numerous instances of the emergency 'circuit breaker' mechanism being brought into play after the Shanghai and Shenzhen exchanges fell by more than 7% within the early hours of trading. Meanwhile the currency continues to weaken against the much-more-sought-after dollar, following a recent rate hike by the Federal Reserve and a flock to perceived "safe haven currencies" amid increasing global uncertainty.

While this recent revelation about GDP growth has caused a great deal of panic, it has to be conceded that it didn't come as too much of a surprise to most financial commentators. When a group of leading analysts were polled by Reuters towards the end of last year, the consensus was that GDP growth for 2015 would be about 6.7-6.8%. In that regard, although still not overly impressive by most people's high standards, the data which shows a 6.9% growth rate has surpassed expectations.

In order to calm nerves, however, the Chinese government and central bankers have asserted that the slower growth is indicative of the ongoing transition towards what the Xi Jinping administration has dubbed 'the new normal' – a more sustainable economy that focuses on steady, domestic consumption and service sector growth as opposed to the old 'growth at all costs' model that served the country well during the boom years but has now come to an abrupt conclusion. Premier Li Keqiang has said that slower growth is acceptable, although he emphasised that this must be accompanied by strong jobs growth and a bold program of economic reform.

And not all financial analysts are seeing the latest data as being catastrophic. Catherine Yeung, from Fidelity International, said: "The health of the labour market, retail sales and industrial production data are all key indicators for growth.

"Like any economic data, it's important to look at the themes and trends that drive them and not just the headline figure...When you look at China with this lens, we're not seeing a meltdown, just a slowdown," she added.

Others said the numbers were actually a relief. "GDP was generally in line with what many, including the IMF, expected," said economist Tony Nash. "China's growth in 2015 was equivalent to the size of the entire economy of Switzerland or Saudi Arabia...That's not an easy feat and shows the magnitude of the accomplishment".

Despite the fact that the current trend does indeed seem to indicate that Beijing's plans to restructure the economy and deliberately burst some of the bubbles that have built up during the era of breakneck growth and rampant credit expansion, many commentators are now calling on the government and the People's Bank of China (PBoC) to enact stimulus measures. In the last year, we have already seen a number of policy measures – several interest rate slashes, currency devaluations and tax cuts for businesses - that were aimed at boosting growth in the tradition driving sectors. Now there is a sense amongst investors that although the government are pressing ahead with their reform agenda there will be a series of new measures announced in 2016. What these stimulus moves may involve, however, has not yet been articulated. With inflation remaining low there certainly is still some room for further interest rate cuts. Centrally-led investment -- particularly infrastructure spending -- is always a possibility in any emerging economy in this stage of development. Moreover, while the general aim is to move away from export-dependent growth, there may well be more interventions into the currency markets by the PBoC over the course of the year.

Aside from all the talk of pure GDP growth, one area of the economy that returned to the headlines this month was the property sector. That is because there are now some signs that a steady recovery -- from the corrections we saw in 2014 – is now gaining momentum. According to data released by the National Bureau of Statistics, house sales grew by 16.6% over the course of 2015. As Ester Fung, of The Wall Street Journal, points out, "House sales totalled 7.28 trillion yuan (USD 1.11 trillion) for the whole of 2015, according to data released by the National Bureau of Statistics. Sales were worth 6.25 trillion yuan in the first 11 months of the year, up 18% from a year earlier. House sales in 2014 fell 7.8%".

Calculations made by The Wall Street Journal indicate that in December, house sales totalled 1.02 trillion yuan, up 8.9% from a year earlier, compared with the 23.5% increase recorded in November.

Again, as with the GDP figures, this property market date isn't too much of a surprise given that the government has cut interest rates six times since November 2014, as well as lowering the amount of reserves banks are legally required to hold and loosening restrictions on buyers in some cities. The question now is are we heading towards another housing boom or is it merely a case of confidence returning to the sector after recent turmoil in the equity markets.

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