China’s consumer-led transition sees slowest growth in 25yrs. 6.9% in 2015.

Transition always bring with it unintended consequences, and China’s move to a consumer-led economy is slowing the world’s largest economy. And while the 6.9 percent growth in 2015 is just below the 7 percent target and the slowest in 25 years, China is still one of the fastest growing economies globally. Analysts do see growth slowing further though as the economy looks to stabilise, it’s the first time the country’s services sector accounted for more than 50 percent of GDP. And they expect attention to turn more to a focus on supply-side reforms such as slashing excess industrial capacity and labor in state enterprises, cutting taxes and boosting productivity this year. – Stuart Lowman

From AFP

China’s gross domestic product growth slowed to 6.9 percent in 2015, official data showed Tuesday, the weakest annual rate in a quarter of a century for the world’s second-largest economy, a mounting concern for global investors.

The figure was the slowest in the People’s Republic since the 3.8 percent of 1990, a year after the bloody Tiananmen Square crackdown rocked the country and isolated it internationally.

Labourers work at a construction site in Beijing's central business district, in this June 11, 2015 file photo. China's bank lending slowed in December but companies raised more credit via bonds and shadow banking channels, raising questions over the quality of borrowing in the face of weak demand and deflationary pressure. Banks extended 597.8 billion yuan ($90.76 billion) of new loans in the final month of 2015, less than expected and down from 708.9 billion in November, data showed on January 15, 2016. REUTERS/Jason Lee/Files
Labourers work at a construction site in Beijing’s central business district, in this June 11, 2015 file photo. China’s bank lending slowed in December but companies raised more credit via bonds and shadow banking channels, raising questions over the quality of borrowing in the face of weak demand and deflationary pressure. Banks extended 597.8 billion yuan ($90.76 billion) of new loans in the final month of 2015, less than expected and down from 708.9 billion in November, data showed on January 15, 2016. REUTERS/Jason Lee/Files

The performance of China, a major driver of the world economy, is a crucial concern for global investors, and its fourth-quarter growth also slowed to 6.8 percent, the National Bureau of Statistics (NBS) said, the softest reading since the global financial crisis.

Both figures matched the median forecasts in an AFP survey of 18 economists.

China’s leaders — who had set a target of “about seven percent” for GDP growth in 2015 — are looking to transform the country’s economic model away from the investment and exports of the past to one more oriented towards domestic consumer demand.

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“The economy is in the process of stabilisation, but it hasn’t stabilised yet,” Liao Qun, chief economist at Citic Bank International in Hong Kong, told AFP.

China’s services sector accounted for 50.5 percent of GDP in 2015, the NBS said in a statement, the first time it was more than half the economy.

The structural transformation was still underway, it added, calling it “a crucial period during which challenges need to be overcome and problems need to be resolved”.

“The task of comprehensively deepening the reform is still heavy,” the body said.

Last year’s growth figure was well below the 7.3 percent recorded in 2014, and the AFP survey projected it would fall further this year, to 6.7 percent.

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“The situation in 2016 will be more or less the same as in 2015 and China’s economic growth will still face a complicated and volatile international situation,” NBS chief Wang Baoan told reporters.

But while some sectors will see destocking and overcapacity reduction, he pointed to new areas such as online retail and renewable energy cars as still growing fast.

As such, he said, “We think in 2016 China’s economic growth will remain stable. We are confident in that.”

Challenges

Citic Bank International’s Liao said there was “not much of a possibility” for a further sharp slide this year.

But he warned: “The economy will require further loosening of monetary and fiscal policies.

“Declining exports due to the external environment and decreasing investment in the real estate sector will be the biggest challenges faced by China in the coming year.”

China’s industrial production, which measures output at factories, workshops and mines, rose 5.9 percent year-on-year in December, the NBS said, down from 6.2 percent in November.

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Retail sales, a key indicator of consumer spending, increased 11.1 percent year-on-year in December — down a fraction from November — while fixed asset investment, a measure of  spending on infrastructure, expanded 10.0 percent in the year.

Those results fell short of economists’ expectations, according to a survey by Bloomberg News, which predicted retail sales rising 11.3 percent year-on-year in the month and industrial production expanding 6.0 percent.

Nonetheless Chinese stocks were flat in late morning, as the economic growth figures came in line with expectations.

The benchmark Shanghai Composite Index was up 0.04 percent at 2,914.96, having risen 0.71 percent shortly after the figures were released.

The Shenzhen Composite Index, which tracks stocks on China’s second exchange, edged up 0.02 percent to 1,830.69.

Unexpected moves in the yuan exchange rate — after a surprise devaluation in August — have disturbed investors in recent weeks, who worry that the real picture is worse than portrayed and authorities may not have the ability to implement reform and manage the transition to a more market-driven economy.

(Bloomberg) — China’s economy slowed in December, capping the weakest quarter of growth since the 2009 global recession, as the Communist leadership struggles to manage a transition to consumer-led expansion.

Industrial production, retail sales and fixed-asset investment all slowed at the end of the year, while gross domestic product rose 6.8 percent in the fourth quarter from a year earlier. Full-year growth of 6.9 percent, the least since 1990, was in line with the government’s target of about 7 percent.

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Downward pressure on industry threatens to spread to consumption and services — an unwelcome prospect for policy makers who must weigh the need for further monetary easing with the risk it would spur more weakness in the yuan and additional capital outflows. Another dilemma: cutting excess capacity that’s weighing on old industrial drivers without triggering a deeper slump.

“Growth is still soft but it’s not collapsing,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors Ltd. in Sydney. “Policy stimulus measures are helping but more is needed to help the economy as it transitions from a reliance on manufacturing and investment to services and consumption.”

Industrial production posted one of the weakest gains in the past quarter century, increasing 5.9 percent in December from a year earlier. That compared with a 6 percent median estimate of analysts and November’s 6.2 percent.

Retail sales increased 11.1 percent from a year earlier, compared with the 11.3 percent projected by economists. Fixed- asset investment excluding rural areas expanded 10 percent last year, the slowest pace since 2000.

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“This may complicate the fragile balance between carrying out reforms and maintaining growth,” said Daili Wang, a Singapore-based economist at Roubini Global Economics LLC. “Fourth quarter growth was a mere 1.6 percent quarter-on- quarter, with annualized growth at 6.4 percent, already lower than the 6.5 percent growth target,” citing his own calculations based on Tuesday’s data.

China’s top leadership has signaled in recent months it may allow some additional slowness as they tackle delicate tasks such as reducing excess capacity, but nothing that could threaten President Xi Jinping’s goal of at least 6.5 percent growth through 2020. The world’s second-largest economy will slow to 6.5 percent this year and 6.3 percent next year, according to the median of economist estimates.

Xi’s long-term growth goal remains in reach if the government “takes decisive measures to tackle the highly indebted corporate and local government sectors in the coming two years,” Liu Li-Gang, head of greater China economics at Australia and New Zealand Banking Group Ltd. in Hong Kong, wrote in a note. “Traditional fiscal and monetary policy will only have secondary impact on the economy by mitigating the pace of the slowdown.”

After a roller coaster 2015 that included a surprise yuan devaluation, a record plunge in foreign-exchange reserves, and an equity rout that at one stage wiped out $5 trillion in value, stocks have plunged anew in 2016.

Read also: Currencies, stocks feel pressure of the devalued Chinese Yuan

The Australian dollar, which typically fluctuates in reaction to signs from China, Australia’s biggest export destination, fell in the 30 minutes after the GDP release. The Shanghai Composite Index was 1.6 percent higher as of 12:30 p.m. local time, paring this year’s loss to 16 percent. Hong Kong shares also advanced.

Two-Speed Growth

China’s economy is growing at two speeds, with old rust- belt industries from steel to coal and cement in decline while consumption, services and technology do better. Services accounted for 50.5 percent of output last year.

The policy response to last year’s slowdown included accelerated monetary easing with six interest-rate cuts since late 2014 and increased fiscal spending. Through the turbulence, the central bank forged ahead with interest-rate liberalization by removing a cap on deposit rates and won the International Monetary Fund’s approval for the yuan to enter its Special Drawing Rights basket of reserve currencies.

This year, attention is likely to turn more to a new focus on supply-side reforms such as slashing excess industrial capacity and labor in state enterprises, cutting taxes and boosting productivity.

“China’s monetary policy should remain extremely accommodative,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “While headline growth looks fine, the breakdown of the figures points to overall weakness in the economy. More importantly, recent market turmoil warns many of the weakness of China’s economy and its financial system.”