Real GDP was up just 6.9% in 2015, down 0.5 pps from 2014, and its lowest growth rate for 25 years. This is causing great consternation in international markets. Yet the weakening growth trend is diminishing. GDP in Q4 was up 6.8% y/y, down only 0.2 pps from Q1, while H2 growth was stable. The slowdown only began diminishing after the government made a major macroeconomic adjustment. Since July, fiscal spending has been rising by more than 20%, and M1 has grown quite quickly as well. We expect fiscal and monetary policy to be looser in 2016, and the overall growth rate to stabilize, as it moves to the so-called “new normal.” Industrial output was up 6.1% y/y in 2015, down 2.2 pps from 2014. But industrial output performed better in H2 than in H1, showing a sound trend within the year. Fixed asset investment rose 10% y/y in 2015, down 5.7 pps from 2014. But various indicators in Q4, such as new project openings, suggest investment will pick up in early 2016.
Retail sales of consumer goods in 2015 rose 11.1% y/y in nominal terms. CPI rose 1.4%, but the ex-factory price index of industrial products fell -5.2% y/y. This is the biggest gap between the two indicators since their first statistical appearance in 1987.Exports in dollar terms fell -2.8% y/y in 2015, and imports fell -14.1% y/y. After removing seasonal factors, total exports after March were recovering slightly, and total imports after May were not as low as unadjusted data suggest.
Monetary policy was shifted significantly last year, from a tightening to a loosening stance. After July, M1 quickly rebounded, and in particular, M1 rose 15.7% and 15.2% y/y in November and December, respectively, significantly up from the level of 2.9% growth rate in March.
The Central Bank on January 17th announced that it would raise the reserve requirement ratio for yuan deposits in offshore yuan-clearing banks, as its latest bid to stem currency speculation. Meanwhile, China’s foreign exchange reserves shrank by a half trillion in 2015, to $3.33 trillion, raising international concerns. We expect the Chinese government to use such capital controls, and its still-gigantic foreign reserves, to stabilize the yuan, and to weaken it against the U.S. dollar, until the full correction (from overvaluation) is complete. Capital controls are periodically necessary, to allow China to stabilize its markets, given the country’s immature financial market, and its new entry into the liberalized international capital markets.
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