The Chinese economy has definitely seen better times. 2016 started out rough with trading halted in the Chinese stock markets when the wild fluctuations triggered circuit breakers that led to a further downfall of the market.
Due to its size and significance, the China’s economy had no doubt been the spark that ignited many of the world’s economic headlines. Therefore, to have an idea of what the rest of the year will hold, it’s crucial to have a slight idea of what might happen in China in 2016.
Making international headlines on a daily basis, China is without a doubt at the heart of the world economy with the immense power of being able to release announcements that could destroy investors’ confidence and/or send markets on their way down. The saying, “If China sneezes, the whole world catches a cold” is now truer than ever.
Taking into consideration that the Chinese economy is still growing and going through lots of extreme changes that will undoubtedly send global shockwaves, the whole world has its eyes on China and is anxious to see what will happen next.
As China transitions itself from a manufacturing-led to a consumer-led economy, and from a state-directed one to a free market, there are three economic trends in China that InvestAsian sees happening in 2016.
GDP Growth Will Fall, but Not Crash
GDP is one of the more reliable indicators of how well an economy is doing, especially in respect to how well it has done in the recent past.
Due to China’s unbelievably robust growth over the past decade, averaging double digit GDP growth, the recent downward trend is quite alarming for many investors around the world.
A number of analysts have commented what they see coming in 2016. The average forecast of GDP growth for this year is around 6.1%, which is a slight decline from 2015’s reported 6.9%. A few factors slowing down GDP growth are the high leverage in the economy and rising labor costs.
Despite a gradual slowdown of the economy, many analysts believe that there is very little chance that the market will crash, especially with the government’s ability to handle any crisis with its near-unlimited pool of resources.
According to a Credit Suisse report, “Long term, we remain bears, and see a high risk of a hard landing, but near term there are signs of stability.”
More Rate Cuts Will Follow
2015 saw a repeated lowering of interest rates and 2016 should be no different. Many analysts believe that China will look to continue its monetary easing policy to contain its economic slowdown.
An analyst from an award winning research arm of Barclays predicts at least two more 25 basis point rate cuts, taking into account the need to support sentiment and reduce debt burden.
Even though many analysts agree that rate cuts are coming, some doubt how well the earlier ones achieved their goals given the country’s current policy rate and money market intervention system.
Yuan Will Increase in Value
The Yuan’s addition to the IMF’s basket of reserve currencies paves way for its wider use in trade and finance, in addition to supporting China’s standing as a global economic power. So far, the IMF’s basket of reserve currencies is limited to just four currencies — the US Dollar, the Euro, the British Pound and the Japanese Yen.
Further adding to the Yuan’s international usage is the fact that the US Dollar, along with its status as the global reserve currency, is slowly waning . The Dollar’s share of central banks’ foreign currency assets has declined from 70% in 2001 to 60% in 2010. The Yuan is a prime choice to “pick up some of the slack”, so to speak.
These two things will lead to more usage of the Yuan in the international marketplace, and with that, many analysts are predicting that the Yuan will appreciate due to the market dynamics.
With these 3 key trends pointed out regarding the slowing GDP growth, imminent rate cuts, and the appreciation of the Yuan, InvestAsian hopes that you as a reader will be more prepared for the events of 2016, in China as well as globally.
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