The National Bureau of Statistics has reported that real GDP growth in China's two-track economy eased to 6.8 percent year-on-year in the fourth quarter, making the whole-year growth 6.9 percent in 2015, just shy of the government's target of 7 percent and in line with our expectations.
The growth picture remains two-sided. The real estate construction slump and weak exports continued to weigh on activity and prices in industry, especially heavy industry. The NBS reported that real value added growth in the secondary sector was 6.1 percent in Q4. But we think that the NBS has overstated the real growth of industry in 2015. Based on a bottom up calculation of industry's gross output, we estimate secondary sector value added growth was 4.2 percent year-on-year in Q4. This implies overall real GDP growth of 6.1 percent year-on-year in Q4 and 6.3 percent for the whole of 2015.
However, consumption continued to expand robustly, supported by solid wage growth. With real household average income up 7.1 percent year-on-year in Q4, real private consumption rose 7.2 percent for the year, supporting light industry and the service sector, where pricing power strongly exceeds that in heavy industry. Nominal value added growth in the tertiary sector remained flat at 11.9 percent in Q4, supporting overall nominal GDP growth of 6.0 percent.
With nominal GDP growth in services exceeding that in the secondary sector by an unprecedented margin, the share of the tertiary sector in overall GDP rose a whopping 2.5 percentage points to 50.5 percent in 2015. While this suggests substantial rebalancing, it is in part due to severe downward pressure on output prices in overcapacity sectors as many firms are not responding sufficiently to price signals, underscoring the need for bolder reform.
The robust growth in the consumption and services nexus is key for policymakers - they need it to avoid labour market stress.
The monthly data show that the two-sided picture has largely continued through to the end of 2015 and that, notwithstanding the recent equity market turmoil, there are no signs of a more drastic slowdown than we expected previously. Nominal fixed asset investment growth remained flat at 10.2 percent year-on-year in December while real growth of value added in industry weakened from 6.2 percent in November to 5.9 percent in December. Meanwhile, real retail sales rose 11.5 percent on a year ago and sales of passenger cars to dealers were up 18.3 percent year-on-year.
We expect these trends to broadly continue in 2016, with overall growth down further as real estate construction remains a drag, cushioned by relatively robust consumption. Having said that, we expect consumer spending growth to ease this year as wages increase moderately and the risk remains that the weakness in industry spills over more forcefully into consumption and overall growth.
In this setting we expect the government to take further measures to ensure that GDP growth does not deviate too much from the likely target of 6.5 percent. On the monetary front, we expect another rate cut and several cuts in the reserve rate ratio. However, with the room for credit-based stimulus starting to narrow, we expect official fiscal policy – with a higher deficit, financed by issuance of government bonds – to play a larger role in supporting growth than in the past.
The author Louis Kuijs is head of Asia economics at Oxford Economics.
