China 2016: what’s in store for the world’s second largest economy?

2015 was undoubtedly a turbulent year for the world’s second largest economy; and with trading on the Chinese markets halted this morning after dropping over 7 percent, 2016 has set off to a worrying start. But what lies in store for this year?

Slowing growth

Whilst there is debate on just how slow growth will go, most analysts are in agreement that the Chinese economy will continue to struggle.

For the last five years, the government has tried to grow the economy at 7 to 8%, but the most recent statistics suggest growth has slowed to below that by the end of 2015. Looking forward, predictions sit at a growth rate of around 5 – 6 percent; UBS analysts are the most optimistic at 6.2 percent, with Citi Research slashing growth estimates to just above 5 percent.

However, even these figures remain well above the global growth rate, which The Organization for Economic Cooperation and Development has recently cut from 3.6% to 3.3%.

Further rate cuts

The Chinese stock market crisis in July caused repeated interest rate cuts in 2015, the most recent in October down to 4.35 percent. According to Barclays Research, this trend is set to continue; analysts are predicting two more 25 basis points benchmark rate cuts in the first half of 2016.

Further depreciation of the yuan

2015 became the year that the IMF officially agreed to include the Chinese currency in the benchmark SDR basket. Whilst devaluation of the yuan may still be necessary in 2016 to confront any further economic setbacks, Francis Cheung, head of China/Hong Kong Strategy for Hong Kong-based brokerage CLSA, told the LA Times that a large devaluation is unlikely: “it will be a big setback for their plan. The incentive is to keep the renminbi relatively stable.”

Impact of China’s One Belt One Road policy

Chinese premier Xi Jinping announced the “One Belt, One Road” development strategy in 2015, designed to increase China’s economic activity and promote the country’s relationship with all countries between itself and Europe.

The impressive strategy, which aims to involve 65 countries, has lined up three major institutions to 2016 to help fund it – the Silk Road Fund, the Asian Infrastructure Investment Bank and the New Development Bank – and is planned for full operation later this year. The key to the plan is investment in road and rail infrastructure across what once was the ‘Silk Road’ through Central Asia, West Asia, the Middle East and Europe, and aims to increase the flow of trade and exports.

Should China pull off this plan in 2016, trading relationships with other countries will dramatically improve, hopefully boosting the unstable Chinese economy.

2016 outlook

It is clear that, whilst the outlook for 2016 is relatively uncertain, growth will remain slow and the market unstable. Xi Jinping’s economic policies designed to deal will turbulent markets will continue to come into play, alongside the One Belt One Road policy being launched in 2016. Daffyd Davies, partner at Charles Hanover Investments, says:

“Whilst China’s drive to shift from an export led economy to a more domestic demand-based economy continues to push forward, we see this path being no straight line. The current outlook indicates the continuation of highly volatile markets into 2016; in particular emerging markets that are heavily reliant on China whilst being hit by the strong dollar could see significant economic hurdles in the coming months.”

Miranda Wadham on 04/01/2016
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