China Economic Outlook 2015
Key Developments in Brief Economic development
Growth drivers
Risks
GDP growth between 7-7.2%
Services and retail
Slowdown in new job creation
Managed slowdown occurring
Urbanization and infrastructure
Deflation risk
Fundamentals remain healthy
Industrial upgrading
Industrial overcapacities
Economic risk increasing
Falling energy prices
Real estate market slump
Price levels
Foreign trade
Labor market
Falling prices area of concern
Foreign trade to remain sluggish
Service sector jobs expanding
CPI increase around 2%
Shift to higher value-added exports
Wages to increase around 10%
PPI fall to continue
Expanded use of RMB
Productivity growth struggling
Stabilizing policy adjustments Deepening of structural reforms
Macroeconomic Indicators growth in %
GDP
2008
2009
2010
2011
2012
2013
2014
9.6
9.2
10.4
9.3
7.7
7.7
7.4
23.6 25.9 12.9
-2.6 30.5 11.0
17.4 23.8 15.7
9.7 24.0 13.9
-3.7 20.6 10.0
5.3 19.6 9.7
1.7 15.7 8.3
5.9 6.9
-0.7 -5.4
3.3 5.5
5.4 6.0
2.6 -1.7
2.6 -1.9
2.0 -1.9
17.5 18.4
-16.0 -11.2
31.3 38.7
20.3 24.9
7.9 4.3
7.9 7.3
6.1 0.4
Investment and output Utilized FDI Fixed asset investment Industrial production
Price levels Consumer prices (CPI) Producer prices (PPI)
Foreign trade Exports Imports Source: NBS
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China Economic Outlook 2015 Economic Development 2015 Economic growth in China will continue to fall in 2015, with GDP growth estimated to be between 7.0-7.2%. Rather than experiencing an abrupt crash, the economy is slowly downshifting from high to medium growth. Given the size of the Chinese economy in absolute terms, this slowdown is natural, and unlike after previous slowdowns, a significant rebound in growth should not be expected. Economic transformation and the implementation of reforms are an ongoing process attempting to amend China’s economic development model towards a more sustainable growth pattern. Deepening reforms have the potential to cause shortterm economic disruptions as mounting structural problems are eradicated. Tolerating a slowdown in certain sectors of the economy in favor of shifting the growth momentum towards domestic consumption, services and innovation will test policy makers’ commitment to accepting lower levels of GDP growth. The structural slowdown to medium growth is at present occurring within a generally stable macroeconomic environment. Key macroeconomic indicators have been slowing, but are generally still expanding at high levels. Key targets of economic policy in 2015 will focus on preventing a substantial slowdown of GDP growth as well as on defying the risk of deflation. Targeted easing of monetary policy to facilitate money supply as well as measures to encourage and support SMEs and export companies, coupled with easing of real estate restrictions and public spending on infrastructure, aim to counter the risk of growth slipping below 7%. Monitoring new job creation in 2015 will be of substantial importance, as more heavy-handed stimulus measures are expected should the stillresilient labor market weaken.
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Given its economic weight, even at moderate growth rates of around 7% China can maintain its position as an important global growth engine. 2015 will mark a decisive year for deepening reforms to bring China on a more sustainable development path. Downward pressure and economic risk, however, are increasing, forcing the government to strike a careful balance of supporting economic growth while advancing its ambitious reform agenda.
Reforms Restructuring and economic upgrading are vital in shifting to a new growth model. China is in the midst of massive structural reforms. Manufacturing’s share of China’s economy is declining, while the service sector now contributes the largest share to GDP. After years of rapid economic growth, China needs to adjust its growth model, which is heavily reliant on investment and exports. Achieving this requires boosting domestic demand and services, while the industrial sector needs to move up the value chain. Progress already occurred in 2014: the government announced that 80 key tasks were completed and another 108 reform points have been initiated. By the end of 2015 the tertiary sector is expected to contribute to about 50% of GDP. Among other areas, steps to improve resource allocation by strengthening market mechanisms, opening monopolies as well as reducing market restrictions in services can be expected this year. In an effort to free up savings for domestic consumption, expanding the social safety net will increasingly draw policy attention. 2015 will mark a crucial year for deepening and accelerating the comprehensive reforms. Despite the advances it should be noted that profound structural changes take time and are only gradually taking shape. Reforms will encounter
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China Economic Outlook 2015 economic and political headwinds and the actual reform scope as well as speed in various areas will differ widely. Key areas of reforms Strengthening of market mechanisms
Financial market liberalization
Administrative reforms
Bureaucracy reduction
Opening of service sector
Reform of SOEs and monopolies
Progressing rule of law
Expansion of social and health insurance
Tax and fiscal reforms
Reform of household registration system
Price Levels Consumer prices increased by only 2.0% in 2014, with price increases in the last quarter being particularly weak. Absent of a strong stimulus and a recovery of oil prices, upward pressure on consumer prices will continue to be weak. Reflecting industrial overcapacity and falling commodity prices, producer prices have been falling for 34 consecutive months. Overall price levels in 2015 are expected to remain at low levels, with consumer inflation increasing at around 2%, while producer prices are unlikely to recover during the economic slowdown. Given the low level of price increases, the risk of deflation will be a policy concern, but with GDP expanding at around 7% and with sufficient policy tools at hand it is unlikely to evolve into a macroeconomic threat.
Foreign Trade 2014 marked the third year foreign trade failed to reach its growth target, underlining persistent weak global demand and falling demand in the wake of lower economic growth in China. Export performance will remain vital for GDP growth, but growth is likely to see greater fluctuations. Together
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with increasing competition from Southeast Asian countries, especially in low-end manufacturing, exporting companies are coming under pressure. Processing and lowtech manufacturing is expected to further shift to inland regions or relocate to lower cost Asian countries. In the future exports of more sophisticated goods as well as services are likely to gain in importance. Developed markets will remain the most important, but export growth to emerging economies, notably within the ASEAN region, will accelerate. Imports have been sluggish in 2014 as commodity prices dropped and Chinese demand cooled. The situation is likely to persist in 2015, with imports only growing at low levels. Record current account surpluses are increasing the pressure for the RMB to appreciate against the USD. Given the weak global environment there is, however, a chance that the Chinese government will depreciate the RMB in order to boost exporting manufacturers should GDP growth prove too low. Policies to facilitate trade in a weak global environment can be expected to include measures to increase usage of the RMB as well as new free trade agreements and expansion of the “new” Silk Road.
Labor Market Employment growth remained resilient in the face of slower economic growth thus far, adding 13 million new jobs in 2014 with urban unemployment stable at about 4%. The service sector represents the largest share of GDP and has evolved to a major contributor for growth which has had a positive effect on job creation. In general, expansion of the service sector generates more new jobs per percentage point of GDP growth. However, some sectors of the labor force, notably record numbers of university graduates, are
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China Economic Outlook 2015 struggling to find employment. In 2015 job creation will be particularly important, as the government will carefully monitor the labor market performance as economic growth slows. Wage increases in 2015 will stabilize at about 10%. As was the case in 2013 and 2014, productivity growth will be outpaced by wage increases, undermining China’s competitiveness while posing a key challenge for companies. More detailed information on labor market conditions can be found at the GCC’s Labor Market and Salary Report 2014/15.
Risks and Growth Drivers A slowdown in the real estate sector, dealing with industrial overcapacities, and falling price levels pose risks to economic growth in 2015. Increasing debts of local governments as well as corporate debt are a risk to the financial sector. Another risk is that the current anti-corruption drive coupled with stricter fiscal controls for local government spending, for all its potential long-term merits, may contribute to more cautious decision making, contributing to slower growth. Lower economic growth starting to affect new job creation may develop into a considerable risk. A challenging global economic environment with lackluster growth further poses a risk to China this year. Should GDP growth lose momentum in the beginning of the year, higher levels of intervention – at
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the cost of progress on reform – becomes likely. For new growth drivers to establish themselves will continue to be an ongoing process. In 2015, China’s economy will to a large extent continue to rely on investments and exports. Structural changes are, however, beginning to affect the growth drivers. Growth in services will again outpace that of manufacturing. Retail growth is likely to stabilize at the current high levels. Falling energy costs may boost consumers’ spending power. Generally, the importance of ebusiness and mobile internet will be on the rise. Urbanization projects and infrastructure investments will continue to drive fixed-asset investments, which will be a pillar of growth in 2015. Industrial upgrading and the need to increase productivity in manufacturing, and increasingly in the highly backward agricultural sector, are also expected to contribute to growth. As for regions, growth in the western and central provinces as well as in lower tier cities will outpace growth in the major economic centers. _________________________________________ For further questions please contact: Max J. Zenglein, Economic Analyst Email:
[email protected] Phone: +86 10 6593 6665
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China Economic Outlook 2015 Key Economic Indicators Growth in percent on year-on-year basis, except PMI Source: NBS
GDP 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Q1
Q2
Q3
Q4
Q1
Q2
2010
Q3
Q4
Q1
2011
Q2
Q3
2012
Q4
Q1
Q2
Q3
Q4
2013
Q1
Q2
Q3
Q4
2014
Price levels 4% 3% 2% 1% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -1%
2013
2014
-2% -3% -4% Consumer price index
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Purchasing price index
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China Economic Outlook 2015 Key Economic Indicators Growth in percent on year-on-year basis, except PMI Source: NBS
Foreign trade 30% 20% 10% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -10%
2013
2014
-20% -30% Exports
Imports
Industrial production
2013
6
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Jan/Feb
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Jan/Feb
11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
2014
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7
2013
0%
Aug
Jul
Jun
May
Apr
Mar
Jan/Feb
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Jan/Feb
Dec
5%
Jan-Dec
10%
Nov
15%
Jan-Nov
20%
Oct
25%
Jan-Oct
Fixed asset investment Sep
2014
Jan-Sep
Jan-Aug
2013
Jan-Jul
Jan-Jun
Jan-May
Jan-Apr
Jan-Mar
Jan-Feb
Jan-Dec
Jan-Nov
Jan-Oct
Jan-Sep
Jan-Aug
Jan-Jul
Jan-Jun
Jan-May
Jan-Apr
Jan-Mar
Jan-Feb
China Economic Outlook 2015
Key Economic Indicators
Growth in percent on year-on-year basis, except PMI Source: NBS
Retail
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
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China Economic Outlook 2015 Key Economic Indicators Growth in percent on year-on-year basis, except PMI Source: NBS
Foreign direct investment 30% 25% 20% 15% 10% 5% 0% -5%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013
2014
-10% -15% -20%
Business sentiment: purchasing manager index 57 56 55 54 53 52 51 50 49 48 47 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013
2014 Manufacturing
Non-manufacturing
Note: An index above 50 indicates business expansion, while an index below 50 indicates contraction.
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