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Shai Heffetz

After an annus horribilis for China, what does 2016 have in store?


As the world’s second-largest economy, what happens in China is particularly significant for the global economy. 2015 saw the unravelling of China to a large degree, and the Chinese economy has pivoted from an export-based model to one which looks inward to developing the services sector, by way of consumer-centric policies. This shift in focus has taken the world by surprise, but the Chinese have been carefully anticipating this for quite some time.
The Chinese economy is a mix between aggressive capitalism and a command economy. As such, the People’s Bank of China (PBoC) and the authorities in Beijing keep a vice-like grip on almost every aspect of the Chinese economy, ranging from currency strength to equities trading, investment opportunities for foreign companies, access to Chinese markets and so forth.
Owing to the glut of government propaganda, it is difficult to ascertain accurate information regarding the actual performance of the Chinese economy. It is clear that there has been a dramatic cooling of demand in China, as evidenced by sharp declines in imports and exports, loss of confidence in services and manufacturing, declining GDP, and of course the elephant in the room – the $5 trillion equities rout that rocked global markets in Q3 2015.
The spillover effects of China’s weakness are still being felt around the world. The majority of emerging market economies that feed China’s insatiable appetite for raw materials (crude oil, iron ore, coal, natural gas, copper and molybdenum) are languishing as a result of dramatically reduced Chinese demand.
African countries have been severely hit, with the closure of mining companies, the shuttering of several business operations, declining revenues and ongoing deflationary fears across the continent. Without China, demand for raw materials is sorely reduced, and this impacts on the countries responsible for mining and producing these commodities.
As it is impossible to gauge with any degree of accuracy what the actual performance figures of the Chinese economy are, unconventional methods of calculation have been suggested such as the amount of electricity usage for the manufacturing sector.

The China Beige Book

Since 2012 one New York research group has addressed this deficit in the data by producing their own ‘Beige Book’ of the Chinese economy, based on surveys of over 2100 Chinese firms. The results of the Q4 2015 China Beige Book are in stark contrast to the official figures which have reported stabilisation across certain sectors. In fact, declines were evident across the spectrum, in production, profits, sales revenue, capital expenditure, borrowing and hiring.
Investors simply do not know what is really going on in the Chinese economy, and this in itself is unsettling. According to the Beige Book, corporations have reported reductions in earnings across the board. China’s shift from manufacturing to the services industry has not been smooth, and the unofficial figures do not present a glowing performance either.
The Chinese president, Xi Jinping, seeks GDP growth of 6.5% per annum through 2020. The Chinese government is attempting to urbanise hundreds of millions of people, but all that has happened is the creation of ghost cities across China.
Deflation is a real source of concern for the Chinese economy and will likely remain that way moving forward. Just recently, the PBoC moved to stabilise the Chinese currency against the US dollar by 0.09%, following a 10-session loss against the greenback. It is clear that government intervention will remain part and parcel of the Chinese economic model in 2016. For the year to date, the Chinese yuan has lost 4.5% against the dollar.

China in 2016

The about-turn in economic focus from export-driven growth to a service-dominated economy naturally requires time to become fully functional. As China becomes part of the IMF’s SDR, making the yuan one of the world’s reserve currencies, greater focus on transparency and integration with international standards will be expected.
This is definitely one of the more upbeat components of the Chinese economy moving to 2016, although China’s inclusion as a 10.92% member of the IMF SDR will only take effect on 1 October 2016, and there is hope that the central bank of China will reduce its intervention in the currency markets in 2016 owing to its exclusive status with the IMF.
Given China’s performance in 2015, we might expect the following in 2016:

  • Chinese GDP to decrease in 2016, possibly as low as 6%
  • The PBoC will likely reduce interest rates further to stimulate economic growth
  • Increased capital flight to continue from China, despite government intervention
  • The yuan to continue to depreciate in 2016

Brett Chatz
InterTrader.com
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The content of this article is the personal opinion of the author and not InterTrader.com. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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