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China Economy in February 2015

Source: OPEC 2/13/2015, Location: Asia

China’s GDP growth in 2014 was 7.4%, the slowest rate in the past quarter century. Nevertheless, the growth slowdown may still have some way to go. The official GDP figures for the 4Q14 show that on a y-o-y basis growth was 7.3%, the same as in the previous quarter. As a result, full-year growth for 2014 was 7.4% y-o-y, compared to 7.7% in 2013. That slowing growth occurred even though there had been a rapid drop in oil prices throughout the second half of 2014, and despite growing efforts to ease both monetary and fiscal policy in recent months. GDP growth in 2014 was kept unchanged at 7.4%. For 2015, growth expectations have been revised down to 7% from 7.2%. Many China observers are already talking of annual 7% growth there as the „new normal, though expectations are that growth is unlikely to maintain this pace for long.

It seems the pace of economic growth will slow steadily in the next few years, perhaps even below the 7% seen in recent years. This represents a structural rather than a cyclical shift. It is also partly related to demography as China's working-age population continues to shrink. However, a more important factor is the need to re-balance investments, after several years during which economic expansion has been overly dependent on rapid credit growth, channelled largely into investments. Financial deleveraging is still some way off, but even reining in credit growth will slow the pace of investment. Much of the slowdown in investment growth will be concentrated in real estate development. Household consumption should hold up better amid financial tightening, additionally supported by rising incomes. Meanwhile, an expansion in imports will outpace export growth as local demand rises rapidly. Growth in the export of goods and services will, nevertheless, remain firm, despite the negative impact of rising input costs in China on overseas sales. China's Ministry of Industry and Information Technology cut its industrial output growth target to 8% for 2015. Despite some "downward pressure" on growth, industrial performance under the „new normal? will remain within a reasonable range, with support extended to small enterprises. China's actual industrial output growth in 2014 was 8.3%, well below the 9.5% target publicly announced early in 2014. Indeed, every macroeconomic indicator in 2014 came in well below its expected target levels, with the exception of net new job creation. This reflects the fact that despite lower oil prices, the challenges facing China's economy will continue to exert considerable downward pressure on growth. Chinese profits contracted 8% in December 2014, led by weakening growth at stateowned enterprises (SOEs) and within the refining sector. In December alone, accumulated profit growth within the refining sector decelerated 45 percentage points to grow -79.2%, while in the mining sector profits also contracted at even faster doubledigit rates. SOEs saw the largest deceleration in profits, contracting 5.7% in 2014. Overall, industrial profit growth during 2014 in China was 3.3%, compared with 12.2% in 2013.

In terms of shadow banking, the China Banking Regulatory Commission (CBRC) will restructure for the first time since opening in 2003. A plan finalized on 20 January by the CBRC includes the closing of training and information centres, and the opening of two new offices under existing departments. The first of these new offices will focus on investment trusts, while the second will monitor city commercial banks, urban credit unions and privately owned banks. Additionally, a new lower-level bureau will coordinate the regulation of loan guarantee companies, small loan enterprises, rural financial institutions and online lenders. According to comments from a CBRC official, the restructuring will conclude by March 2015.

The impact of falling global commodity and oil prices on inflation in China means that the People's Bank of China (PBC) will be able to keep 2015 interest rates lower than otherwise would have been the case.

Exports to China from Japan, Korea and Taiwan appear to have contracted again at the end of the year.

China’s official manufacturing PMI rose to 49.8 in January, up from 49.7 in December. However, it remains below 50. Domestic demand improved marginally while external demand remained solid. The labour market weakened and prices fell further. Today's data suggest that the manufacturing slowdown is still ongoing amid weak domestic demand. More monetary and fiscal easing measures will be needed to support growth in the coming months.

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