Lower Growth for the Long Haul
Executive Summary
China’s main indicators show that the economy has reached a “new normal” stage, of relatively low yet stable performance. Real GDP rose 7.4% in 2014, down 0.3 pp from 2013. That puts growth below 8% for three years in a row. Quarterly growth rates were fairly flat last year, too.
Industrial output has plunged: its 8.3% rise represented a 1.4 pp fall from 2013, which knocked 0.5% off GDP growth. Fixed asset investment rose 15.7%, down 3.9 pps from 2013. Retail sales of consumption goods were up 10.9%, down 0.6 pps.
Dollar appreciation has pushed the yuan up against most other currencies. Exports were up 6.1%, down 1.8 pps from 2013. But weaker imports generated a bigger trade surplus. Though currency appreciation will play a negative role, we’re still optimistic about export performance for 2015.
Fiscal revenue and expenditure rose 8.6% and 8.2%, respectively. Consistent with the concept of “new normal,” q/q growth rates were low, but stable. We expect this situation to continue, considering the government’s “new normal” target.
The Central Bank in November announced it was cutting one-year benchmark lending rates by 40 basis points, to 5.6%, and one-year benchmark deposit rates by 25 bp, to 2.75%. On February 4, it further cut banks’ reserve requirement ratios (RRR) by 50 basis points.
The Ministry of Commerce announced on January 21st that Chinese outward direct investment (ODI) had reached about $140 billion, about $20 billion above FDI placed in China. So 2014 was first year that Chinese ODI outstripped FDI -- and we think this trend is likely to continue in 2015. China is becoming a net supplier of global capital, and redefining its role in the global economy.
The State Council in December announced three more free trade zones, for Guangdong, Fujian and Tianjin -- a major expansion after the Shanghai Free Trade Zone. On November 17th, the Shanghai-Hong Kong stock connection mechanism was officially established. These new policies will integrate the Chinese market further into the global economy, and become a new source of growth.
People’s Bank of China Governor Xiaochan Zhou said in Davos in January that the Central Bank would keep its monetary policy stable. That’s the “new normal,” he said. We interpret his comments as a focus on making structural changes to the economy, rather than growth, the priority. Still, with deflation risk and deteriorated economic statistics, we think monetary policy will probably be loosened, to keep growth from falling further.
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