Overall economic growth
Fears about China’s economy are shaking global markets and capital is leaving the country at an unprecedented pace.
Investors are eager for clues about whether slides in China’s equity market and currency depreciation at the start of this year were a sign of acute distress in the real economy, or whether policymakers can engineer a gradual slowdown that avoids financial crisis and social instability.
China last year grew at its slowest pace since 1990, dragged down by a severe slowdown in manufacturing and construction, once the main growth drivers.
Components of GDP growth
Consumption has not been growing as quickly as hoped to compensate for the decline in exports
While GDP per person has increased notably in recent decades, it is still only about a quarter of what is seen in the US
Sources of growth
The task of “rebalancing” the Chinese economy weighs heavily on policymakers’ minds. The government is attempting to steer the economy away from investment- and export-led growth, to growth based on domestic consumption. However, it is proving difficult to convince Chinese households to save less and spend more.
A full rebalancing will require economic restructuring. This includes trimming down or getting rid of state-owned enterprises in overcapacity sectors such as coal mining and steel processing where profits have been dropping.
Alternative growth metrics
This alternative metric of growth is composed of three indicators of activity: electricity consumption, rail freight volume and bank lending. However it fails to capture growth in the services sector, now the fastest-growing area of the economy.
Despite the respectable headline growth figure, pain is deepening in the sectors that have traditionally driven Chinese growth and global commodity demand.
The official PMI is signalling mild contraction in the crucial manufacturing sphere. Other unofficial PMIs suggest the slowdown is more pronounced. A PMI value of more than 50 indicates expansion. Lower than 50 indicates expected contraction
China’s bond market is now the third largest in the world - and continues to grow. However, Chinese corporates still rely on bank loans for the majority of financing. The government is seeking to develop the bond market and open it up to foreign investors to diversify China’s funding sources, and move risk away from the banking system.
The inter-bank market accounts for more than 95 per cent of bond trading by volume. Government bond yields are still higher than developed economies
Shanghai Stock Exchange
Since a surprise move in August 2015 to let the renminbi weaken, investors have been struggling to interpret China’s exchange rate policy
The yield spread between 5-year treasury and AA- rated bonds are a gauge of perceived credit risk. An AA- rating is equivalent to junk status in China because lower-rated companies can’t sell debt at all.
The People’s Bank of China sets the one-year benchmark lending rate, which it has cut six times since 2014. It is now phasing out the use of this benchmark rate, and a proliferation of other rates has come into use.
The availability of money is also influenced by the mandatory reserves-to-deposit ratio, which the central bank has also been lowering. Despite this, bank lending trended downwards throughout 2015.
At the same time as loosening its monetary policy, the government has been selling off its dollar reserves and buying up renminbi, thus shrinking the domestic money supply.
Average loan rate
A series of benchmark interest-rate cuts and liquidity injections since late 2014 have lowered financing costs for companies with access to bank credit, especially large state-owned companies and home mortgage borrowers.
The seven-day bond repurchase rate is considered the benchmark for short-term funding conditions in China’s interbank money market.
A collapse in inflation has meant nominal GDP growth has slowed even more sharply than real GDP growth
While economic growth is slowing overall and manufacturing companies are cutting jobs, demand for labour has been propped up by the growing services sector. State-owned enterprises are holding on to employees even in overcapacity sectors, stabilising the labour market but slowing China’s economic restructuring.
Although wages are increasing, discontent lurks below the surface. The official unemployment measures do not take into account migrant workers who are forced to move back to the countryside. Workers might find themselves unable to collect wages owed by bosses in shrinking sectors; strikes are illegal. The China Labour Bulletin recorded a doubling of strikes from 2014 to 2015.
Although China still runs a healthy trade surplus, the surplus of capital outflow over trade inflow has caused a fall in dollar reserves. The central bank has also sold off dollar reserves to support the price of the renminbi.
Goods & services
A lack of investment options means that China’s burgeoning middle class has historically put its wealth in housing. Local governments and state-owned enterprises rely on land prices as a major asset and source of income.
Many commentators expect that the housing sector’s contribution to economic growth will continue to shrink. Some point to localised property bubbles, such as in Shenzhen and Hong Kong, which have an average price-to-income ratio of 18 and 16 respectively, compared with London’s 10. This year China starts a new five-year-plan that prioritises supply-side reforms, such as reducing the stock of unsold housing.
China no longer publishes and official property price index, but Reuters calculates an average based on 70 cities.