Priority back on stabilization

The “controlled growth slowdown” continued in the first quarter of 2016. With real GDP growth of 6.7% on a year earlier, the increase was the lowest for seven years. Without the policy measures taken to boost the economy in the short term, the slowdown would doubtless have been sharper. Although the latest economic data point to a stabilization at the end of the first quarter, overall the trend towards appreciably more moderate growth is likely to continue. We still see average real GDP growth of 6.5% in 2016, after 6.9% in 2015.

At the beginning of this year fears that the Chinese economy might slow down faster than expected prompted turmoil on the international financial markets. In recent weeks these fears have subsided appreciably. And the latest economic data do indeed point to a stabilization in economic momentum at the end of the first quarter. In March the Caixin purchasing managers’ index for the manufacturing sector jumped by 1.7 points. At 49.7 points the index is currently only marginally below the 50-point expansion threshold. Sentiment in the services sector has also improved palpably. The corresponding purchasing managers’ index rose by one point to stand at 52.2 points. The latest figures on industrial production and retail sales are also slightly more upbeat. In March production rose by 6.8% on a year earlier, the steepest rise since June last year. Towards the end of the quarter retail sales also picked up somewhat more strongly than in the preceding two months.

For years now economic policy has resembled a balancing act. On the one hand, the declared aim of the Chinese leadership is to pursue the structural shift away from an export- and investment-led growth model to a consumption-based model, while simultaneously tackling the macroeconomic imbalances that have built up in recent years. But at the same time the government is endeavoring to stabilize short-term economic development in order to avoid an excessive slowdown in growth and the related social costs. These two goals are not always compatible. Our impression is that the government is currently giving priority to short-term stabilization ahead of structural reforms.

All told, we think the monetary and fiscal policy measures already taken and still in the drawer will suffice to keep the Chinese economy on the path of a “controlled growth slowdown” at least in the short term. For 2016 as a whole we continue to see real GDP growth of 6.5%.


Gregor Eder

Allianz SE
Phone +49.69.24431.3358

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