China’s growth deceleration to continue, but no hard landing in sight

HONG KONG - Today’s announced Q4 GDP and a number of December activity indicators suggest an economic soft-landing has been achieved by China in 2015, despite a series of financial disruptions including stock market selloffs and unexpected devaluation of the RMB in the second half of the year, according to BBVA Bank economists Jinyue Dong and Le Xia.

“In particular, Q4 GDP expanded at 6.8% y/y, edging down from the Q3 out-turn of 6.9% y/y and registering the lowest since Q1 2009,” BBVA says. “In sequential terms, growth slowed to 1.6% q/q sa in the fourth quarter from 1.8% q/q sa previously, indicating that the downtrend continues. For 2015 as a whole, GDP growth amounted to 6.9%, broadly in line with the Government target of around 7%.

“Nevertheless, it is more important to realise that the headwinds to China’s growth haven’t abated yet as evidenced by a number of December activity indicators announced with the Q4 GDP figure.

“The authorities therefore need to continue their pro-growth measures to avoid a hard-landing in 2016. We maintain our growth projections of 6.2% and 5.8% for 2016 and 2017 respectively, while highlight the rising risks in financial markets and their adverse spill-over effect to the real economy.”

BBVA says China’s economic rebalancing towards the service sector is continuing. The ratio of service sector to total GDP reached 50.5% in 2015, increasing by 2.4% from the previous year.
Looking ahead, the bank anticipates more easing measures to be deployed to support growth. It is forecasting four RRR cuts of 50 basis points each, and more asymmetric interest rate cuts in 2016.

“At the same time, some other unconventional monetary measures will also be deployed. On the fiscal front, the Central Government is likely to substantially expand fiscal budget deficit to above 3% in 2016 and 2017. The thrust should be to avoid sharp fiscal consolidation at the local government level. www.bbvaresearch.com (ATI).