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.
Components of GDP growth
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
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
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
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.