Paperchase in China

Market analysis - 3/14/2016

Between the structural slowdown and the need to maintain strong growth in order to double the country’s GDP from its 2010 level by 2020, the Chinese government’s balancing act is far from over.

The meeting of the National People's Congress represents an opportunity for the government to review China's growth strategies – and the major risks it faces.   


  • The focus is on economic growth, at the expense of other worrying issues including high debt, inefficient state-owned corporations and the accumulation of risks in the banking sector. The 2016 growth target is 6.5-7%, in line with previous statements coming out of Beijing but above our full-year forecast of 6.4% (see chart and last week's edition of Macro Highlights & Strategy). We reiterate what we consider the government's misstep in announcing a quantified growth target, which leaves the authorities little leeway in the event of a growth shock.


  • With an expected deficit of 3% of GDP, the government's fiscal talk is solidly accommodative.  The same is true for monetary policy, as reflected in expected growth in the money supply and lending (+13%) and likely cuts in key interest rates and bank reserve requirements. These measures should support short-term economic activity but increase long-term risks, especially in the area of debt. And we cannot rule out the rather bleak scenario in which the country's high debt level is worsened by bad debts, which appear to be sharply underestimated in official figures. Capital spending is expected to grow by 10.5% and be used mainly to finance infrastructures, social policies and some tax cuts.       
  • Jobs are also a key consideration in the transition towards greater consumer spending. As in 2015, the goal is to create 10 million jobs. This goal was beaten in 2015, with 13 million jobs created. Implicit in this discussion is the quality of the newly created jobs and how the inevitable reclassification of surplus labour currently working in the manufacturing sector will be orchestrated.   
  • On a positive note, the government seems to sense the urgency of reforming state-owned manufacturers. Few details have surfaced, but one thing is certain: absorbing the production overcapacity will take time. Beijing announced its intention to reduce steel and coal production capacity by 10% in the next few years and set up a fund worth USD 15 billion for affected workers. More information in this regard should be forthcoming. 
  • The property market – like the country itself – is a study in contrasts and requires some harmonising. While housing prices soar in the big cities, the market is sluggish in smaller ones owing to an oversupply. Recent measures to alleviate the situation, including a reduction in the required down payment to buy property, will have to go further to avoid a meltdown.

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