China's Economic Growth Rate Is Seen Falling Until at Least 2018

Beijing (Dec 15)  China's economy, already in the midst of a half-decade deceleration, won’t arrest its downward trajectory until at least 2018.

Six of 12 economists surveyed by Bloomberg last week say 2018 will be the turnaround year, while five said it will take until 2019 or after for growth to re-accelerate. The outlook underscores the challenge facing President Xi Jinping as he aims for gross domestic product gains averaging at least 6.5 percent per year for the next five years so he can deliver on his goal of doubling 2010 income and GDP levels.

Policy makers are in a bind. Efforts to reform the supply side of the economy by eliminating overcapacity and improving the quality of expansion are key to long-term prospects, yet policies to fix the mess may weigh on the short-term outlook. That leaves the need for stimulus that risks adding to a debt pile already hanging over the world’s second-largest economy.

Setting aside the notorious question of accuracy with China’s GDP -- which popped up again this month -- growth is forecast this year to slow to its weakest since 1990 as robust consumption and strength in services isn’t enough to offset the drag from slumping old-economy sectors including steel, coal and cement.

Leadership Reshuffle

A future pick up in the pace of expansion may be driven by economic reforms that gather pace after a leadership reshuffle that begins in late 2017, according to Daili Wang, a Singapore-based economist at Roubini Global Economics LLC.

"My views of re-acceleration are based on the implementation of market reforms in 2018," said Wang. "The ongoing anti-corruption campaign is a perfect barometer measuring opposition power and the 2017-18 reshuffle should prove the last jigsaw to consolidate top leaders political power -- if not done by the campaign before that."

At the 19th party congress in 2017, five of seven members on the Politburo’s supreme Standing Committee -- all except President Xi and Premier Li Keqiang -- are scheduled to retire, having reached or passed the age of 68. China’s top team by convention serves a maximum of 10 years, with a reshuffle at the halfway mark that signals the next party head and sees new members of decision-making bodies picked.

Sliding Growth

Societe Generale SA and Hang Seng Bank Ltd. don’t see growth re-accelerating until 2020 and Guosen Securities Co. estimates it will take until 2025 for the next year-on-year pick up in the pace of expansion. Societe Generale’s Paris-based China economist Yao Wei estimates growth will slide to 5 percent in 2019.

"We don’t have an official forecast for 2018 yet, but my sense is that it will be up slightly from the 2017 rate," said Patrick Franke, an economist at German savings bank Helaba in Frankfurt. "The trend is still downward, however. Medium-term, China is heading for 5 percent or lower."

Doubts over the accuracy of China’s economic data persist. In the third quarter, for example, China reported growth of 6.9 percent. One growth proxy designed by Capital Economics Ltd. in London recorded growth at 4.4 percent while another by Barclays Plc estimated growth of 5.2 percent.

Several local governments in the northeastern provinces of Heilongjiang and Liaoning faked economic data such as revenue and investment figures, the official Xinhua News Agency reported last week, citing unidentified local government officials. Heihe city in Heilongjiang exaggerated 1.9 billion yuan ($294 billion) of investment in 2013, or 8.5 percent of a reported 22.3 billion yuan total investment that year, Xinhua said.

China’s economy began its current slowdown in 2011 after growth of 10.6 percent the year earlier. Expansion slowed to 7.3 percent in 2014 and is estimated to fall this year to 6.9 percent, according to a separate Bloomberg survey.

Economic data for November showed signs of stabilization with industrial production, retail sales and fixed-asset investment all exceeding estimates. Bloomberg’s monthly GDP tracker rose to an estimated 6.85 percent, its best reading since June.

PPI Deflation

Survey respondents also see tough times ahead for producer prices and fixed-asset investment. Factory prices, which have declined for a record 45 months, are estimated to extend that run through to 2018, according to 64 percent of economists surveyed.

Growth of fixed-asset investment, which has been on a downward growth trajectory since 2009, will not re-accelerate until 2018, according to 42 percent of respondents. The same percentage say it will take until 2019 or after for the pace of investment to pick up.

At least two years is needed to ease China’s excess industrial capacity, indicating investment will begin picking up in 2018, said Houshou Haku, an economist at the Hamagin Research Institute Ltd. in Yokohama, Japan.

Hugo Ferraz Penteado, an economist at Santander Asset Management in Sao Paulo, sees China’s expansion tumbling to 5.5 percent by 2019 as private investment decelerates "for years" and the economy shifts from one led by exports and industry to a greater dependence on consumption and services.

"This is not cyclical. This is prolonged deceleration to a new structural growth," said Penteado. "Get used to it."

Source: Bloomberg