Chinese Growth Slowed in 2016 and Will Continue to Slow

Despite a better-than-expected performance in the final quarter of 2016, the Chinese economy grew at its slowest pace in 26 years last year.  Moreover, the actual performance of the Chinese economy in 2016 was probably significantly worse than the official data showed, as no one takes that actual Chinese GDP growth rate as fact.  In fact, a Chinese provincial governor admitted recently that China’s headline economic growth data was largely made up.  Nevertheless, using other economic data that is more difficult to fake, we can identify a number of key trends that will continue to impact the Chinese economy in 2017 and the years thereafter.  Unfortunately, some of this data suggests that economic risk levels are rising dangerously in China and that the country’s economic growth rates (even official ones) could fall sharply in the coming years.

There was some surprisingly positive news from some sectors of the Chinese economy in the fourth quarter of last year.  As a result, the Chinese government indicated that economic growth in China actually accelerated to 6.8% on a year-on-year basis during that period.  Much of this acceleration was the result of an increase in government spending and higher levels of bank lending in late 2016.  Moreover, consumer spending remained strong in China in the latter part of last year, with retail sales growth rates remaining above 10%.  On the downside, the external climate continued to hold back Chinese economic growth, with export revenues remaining weak in recent months.  Nevertheless, this overall performance was better than had been expected, even if much of it was fuelled by a dangerous increase in public spending and bank lending.

Thanks to this late spending and lending surge, the Chinese economy managed to grow by 6.7% last year, well within the government’s target growth rate for 2016.  Still, this is a far cry from the 14% official growth rate that China recorded a decade ago.  Moreover, China’s economy probably grew by just 4% last year, the second consecutive year in which the official Chines GDP growth rate far exceeded the actual rate of growth.  Even worse, many significant risks are emerging that threaten to derail the Chinese economy in the coming years and negatively impact the wider global economy.  First and forecast, debt levels are rising dangerously in China, particularly within the private sector and this has been exacerbated by the surge in bank lending in recent months.  Second, overcapacity issues are becoming a major threat to China’s manufacturing and real estate sectors, two of the key drivers of growth in China in recent years.  While these risks did not result in a hard-landing for the Chinese economy in 2016, they will loom as a major threat over the Chinese economy in 2017 and in following years.

 Looking ahead, Chinese economic growth rates are set to resume their downward trend in 2017.  On the positive side, consumer spending is forecast to remain robust this year, although a reduction in bank lending or a real estate crisis would severely impact what is becoming an increasingly important pillar of growth for the Chinese economy.  In addition, the external sector could improve in 2017 as key export markets rebound and the weakening yuan boosts China’s export competitiveness.  However, China is particularly exposed to the threat of protectionism that is emanating from the United States and Europe, and a trade war would have major consequences for the Chinese economy.  With an uncertain external climate and the growing risks of rising debt levels and overcapacity, the Chinese economy is at a crossroads in 2017, one which will determine whether or not China experiences a managed slowdown or a hard-landing.