Fiscal and monetary stimulus, in addition to structural reforms, will be central factors in determining China’s growth path in 2016, says Standard Life Investments.
Chinese policymakers are expected to walk a “tightrope” throughout 2016 to balance fiscal and monetary stimulus needs to avoid a growth collapse, said Standard Life Investments emerging markets economist Alex Wolf.
Mr Wolf said policymakers will likely, and must, introduce supply-side reforms to remove excess capacity.
“Slowing Chinese demand, which we believe was worse than official data reflected, was one of the largest causes of the emerging market trade and output contraction experienced last year. As such we see some room for cyclical upside, as policy measures take effect,” he said.
Mr Wolf stated that the firm's long-term outlook toward China has turned towards the negative – indicating that GDP growth is more likely around 5.0 per cent than 6.9 per cent as reported by Chinese authorities.
“Although we believe policymakers will avoid a hard landing, it is becoming more likely that Chinese leaders will not enact necessary reforms quickly, especially of state-owned enterprises (SOE).
“SOEs are at the heart of China’s problems, and reforms here would deliver the biggest dividends from a growth and rebalancing perspective, but Beijing has been dragging its feet.”
Mr Wolf argued that SOE reforms implemented over recent months have fallen short despite being met with optimism. He said they failed to address corporate governance issues and to reduce excess capacity through corporate restructuring and closures.
“Consolidation has been the preferred path, and the government seemed unwilling to sell or reduce state assets in a meaningful way,” he said.
If Chinese growth disappoints, Mr Wolf said, volatility will increase within global markets.
“Sluggish growth is priced into markets but a hard landing which impacts on currency, capital flows, commodities and social stability is not.
“This could result in more aggressive domestic monetary easing, forcing the renminbi lower against the dollar, with adverse implications for global inflation and a blow to emerging markets dependent on robust Chinese demand for manufactured goods and commodities.”