The Chinese economy has seen better times. 2016 started out rough with trading halted in the stock markets. Wild fluctuations triggered circuit breakers, leading to a further downfall of the market. The economic trends for China are now in a downward spiral.
Due to its size and significance, the Chinese economy was the spark which ignited many of the world’s headlines. Therefore, to have an idea of what the rest of the year will hold, it’s crucial to know what might happen in China this year.
Making international headlines on a daily basis, China is at the heart of the world economy. It has the immense power of being able to release announcements which could destroy investors’ confidence and send markets on their way down. The saying, “If China sneezes, the whole world catches a cold” is now truer than ever.
The Chinese economy is still growing and seeing lots of extreme changes. They’ll undoubtedly send shockwaves throughout the world.
As the nation transforms itself from a manufacturing-led to a consumer-led economy, and from a state-directed one to a free market, here are three economic trends for China. Plan on them happening.
Chinese GDP Growth Will Fall, but Not Crash
GDP is one of the more reliable indicators of how well an economy is doing.
Due to China’s rapid growth over the past decade, averaging double digit GDP increases, the recent downward trend alarms investors around the world.
Analysts have commented on what they see coming. The average forecast of GDP growth this year is around 6.1%. This is a slight decline from 2015’s reported 6.9%. A few factors slowing down GDP growth are high leverage in the economy and rising labor costs.
Despite a gradual slowdown of the economy, most analysts believe the market won’t crash. This is because the Chinese government has a near-unlimited pool of resources.
For example, lawmakers cannot act unilaterally in the United States and European Union. Bills need to go through parliament or other parts of government before they’re signed into law.
This is not the case in China. The communist party has fewer checks and balances, along with the ability to respond quickly and decisively to any situation.
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 for China
2015 saw a repeated lowering of interest rates and 2016 should be no different. Analysts believe that China will continue its monetary easing policy to contain its economic slowdown.
Barclays, for its part, plans on at least two more 25 basis point rate cuts. This prediction takes into account the need to support sentiment and reduce debt burden.
Analysts agree that rate cuts are coming, but some doubt how well the earlier ones achieved their goals. China’s current policy of market interventionism should make people question the effectiveness of previous actions.
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. So far, the IMF’s basket is limited to just four currencies. These include 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 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. As such, analysts predict the Yuan will appreciate due to the market dynamics.
With these economic trends for China pointed out, InvestAsian hopes you will be more prepared for the events of 2016.
EDITOR’S UPDATE FOR 2017: We’re glad to say that all three of our predictions were accurate. InvestAsian isn’t quite as bullish on China for 2017. Instead, we’re looking at frontier markets such as Vietnam and Cambodia for more growth.
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