February 2016

As the second largest economy in the world, China has experienced explosive growth for decades with global trade and investment centred on this growth. Since 2011, however, the economy has been decelerating, leading to China’s ‘Black Monday’ in August of 2015. A recent decision by the International Monetary Fund to cut China’s global growth forecast to just 6.3% for 2016 (its lowest for over a quarter of a century) has mounted concerns globally that China’s slowdown will be prolonged.

The health of the Chinese economy, in particular the government’s ability to manage the country’s complex structural reform processes, ranks amongst the top issues that are facing the AsiaPac and global economies. The service industry now accounts for nearly half the output from the Chinese economy with consumer spending a positive force. Yet with massive job losses across the manufacturing industry and a sharp decline in both exports and imports, it is believed that the government’s policies relating to the economic slowdown are being poorly communicated. There is also the feeling that there needs to be more focus on directed spending rather than reforms on the management of local government finance and state-owned enterprise.

Government reforms, particularly relating to the opening of the country’s capital account and the reduction of overcapacity of steel, have seen job losses, overall industry losses of $2bn in 2015 and a plunging stock exchange. Whilst it is hoped that the move to a more market-oriented framework will foster competition, it is likely that the Chinese Yan Renminbi will continue to face depreciation pressure vs the USD as these market forces come into play.

The economic outlook for AsiaPac despite China’s performance is expected to be stable, with Asia remaining the global growth leader. While imports to and exports from China have declined across the region, demand to the US, Europe and emerging market India have counterbalanced this to some degree.

Lower commodity prices will affect growth for exporters within the AsiaPac region this year, causing supply bottlenecks and further tightening of financial conditions. Should the Chinese government fail to fully implement reforms the financial shocks will be stronger than expected.

Whilst the slowdown has already affected exchange rates, trade, commodity prices and investment flows across the AsiaPac region it is hoped that with China’s GDP remaining around 6%, the regional economy will weather the storm. Any figures weaker than this pose a huge concern for the region in 2016.