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As China’s new administration takes the reins and plans for the future, QNB Group considers that the economy is on a firm footing and fears about the risk of a sharp slowdown have mostly abated. However, challenges in rebalancing the economy remain as China’s strong growth continues.

Last week, China completed the final formal stage in its transfer of political leadership. At the ceremony, the new prime minister, Li Keqiang, stated that sustaining real GDP growth at around 7.5% over the coming decade (his planned term in office) was the top priority. This target growth rate is slightly lower than the 7.8% achieved in 2012, and well below the 10.4% seen over the last decade. However, it would still represent a major achievement as it would be twice the IMF’s forecast for global growth over the next five years and would nearly double the real output of the Chinese economy by 2022.

The economy has shown promising signs in recent months, according to various key indicators. In the third quarter of 2012 growth had slowed to 7.4% year-on-year, the lowest rate in three years, but then beat expectations by rebounding to 7.9% in the final quarter. Other positive indicators include business confidence measures such as purchasing managers indices (PMIs), which have moved back into expansionary territory (readings above 50) after a period of weakness.

In particular, HSBC’s PMI survey for the critical manufacturing sector reached its highest level in two years in January. Energy usage is another lead indicator of economic activity, with electricity consumption showing firm growth. February economic data showed weaker expansion in some areas, including PMIs, retail sales and industrial production, but not enough to spark serious concerns.

  Graph GDP growth

There are a couple of scenarios that analysts worry about that could lead to a “hard landing”, a slowdown in Chinese growth below about 6% that would create hardship domestically and have a negative knock-on impact on the global economy and commodity prices. The main domestically-driven scenario of concern is a sharp correction in property prices, leading to a slowdown in real estate development, corporate bankruptcies and potential problems for banks with overextended credit.

The property market has certainly been heating up, after relatively weak performance in 2012, and year-on-year prices were up in 62 out of 70 major cities in the year to February, including by 5.9% in Beijing. This is feeding into real estate investment which was up by 16.2% in 2012 and has been even stronger in the first two months of 2013. The investment has been made possible by strong credit growth, but the Bank of China sets maximum monthly lending quotas for banks, and is now putting a brake on the rate of lending growth. Moreover, total credit levels remain fairly modest in relation to deposits and GDP. This suggests that, for the time being, there is little risk of a domestic property or credit crisis.

The consensus among economic forecasters is that growth will remain firm during the next few years. The latest survey by Bloomberg gives a median growth forecast of 8.0% for 2013-15. Looking further ahead, the IMF forecasts growth of 8.4% over the next five years, well ahead of the targeted growth rate. Moreover, no major forecasters currently include a hard landing within their core scenario.

The main medium-term challenge for China’s policymakers is rebalancing the economy away from a very heavy reliance on capital investment and exports towards greater domestic consumption. The major barrier to this shift is a strong preference amongst workers towards saving rather than consuming. It is expected that increasing affluence and the development of social safety net systems, such as insurance and pensions, will reduce the imperative to save and boost consumption, as will a push towards greater urbanisation.

China’s future growth trajectory is of significant importance for GCC countries, because its rising demand for oil and gas is expected to be an important driver for global energy prices. China is also a major source of imports and a destination for investment by GCC companies and funds, and QNB Group expects that these economic ties will further strengthen in the coming years.


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