HONG KONG, CHINA – Growth in the People’s Republic of China (PRC) is expected to ease further in 2016 and 2017 amidst weak external demand and slowing investment. But strength in consumption and services and ongoing government spending will support the world’s second-largest economy, says a new Asian Development Bank (ADB) report.

In its new Asian Development Outlook (ADO) 2016, ADB forecasts gross domestic product (GDP) growth of 6.5% in 2016 and 6.3% in 2017 for the PRC. In 2015, GDP growth was 6.9% and in 2014 at 7.3%. ADO is ADB’s flagship annual economic publication.

“Weak external demand and excess capacity in some sectors, on top of a shrinking labor force and rising wages, ‎continue to induce a gradual decline in the PRC's growth rate,” said Shang-Jin Wei, ADB's Chief Economist. “Supply-side reforms, including improving labor market flexibility, are needed to improve the economy's resilience to negative shocks and raise its potential growth.”

In 2015, services and consumption increased their contribution to GDP growth. Last year consumption accounted for 4.6 percentage points, up from 3.7 points in 2014. Heavy industry by contrast continued to be affected by excess capacity, amidst soft export demand, while an overall slowdown in investment was most pronounced in real estate, which continues to suffer from a housing overhang. In response, the government took a number of steps to try to stem the housing slump, as well as adopting more expansionary fiscal and monetary policies to help meet the growth target.

Moving forward, the sharp slowdown in investment, particularly in real estate and capital-intensive industries, will remain a drag on the economy, but this will be partly offset by further government spending on infrastructure and green investment. Consumption growth will remain robust.

Expansionary fiscal policy will remain in place to ameliorate the short-term negative impact of structural reforms on growth, while steps will likely be taken to strengthen local government finances, including through central government transfers and revenue-sharing agreements. The current account surplus will be maintained in 2016 but slip in 2017, reflecting expected changes in commodity prices, although exports are likely to remain soft given lackluster global demand. The government is expected to peg the renminbi to a more diversified basket of currencies going forward to help keep it stable in trade-weighted terms.

The key risks to the ADO projections include weakening global demand, further volatility in financial markets, another dip in global commodity prices, and a loss of confidence in the PRC economy if uncertainty about exchange rate policy and expectations of further renminbi depreciation trigger renewed capital outflows. Domestically, a weakening of consumer sentiment and a rise in bad bank loans would undermine the forecasts.

The report also notes that liberalizing the household registration (hukou) system would be an effective tool for increasing demand for housing, helping to reduce the current supply overhang. If given full urban resident rights through reform, and better access to credit, many of the 274 million rural migrants currently in cities would be able to purchase unsold properties.

In the industrial sector, tackling excess capacity by simply closing businesses could have many negative consequences including large and widespread layoffs, a spike in social spending, and falling tax revenue, and thus further pressure debt-laden local governments. The report notes that cutting capacity in the iron and steel, coal mining, cement, shipbuilding, aluminum, and flat glass industries by 20% might eliminate as many as 3.6 million jobs, or 0.7% of total nonfarm employment. The national government’s more gradual approach to reducing production capacity, and its encouragement of mergers rather than bankruptcies in state companies, is helping to avoid a more extreme fallout from rebalancing the economy.

Inflation is set to rise over 2016 and 2017, given further price deregulation and an expected pickup in commodity prices from current lows, but the rate will still remain under the government’s ceiling of 3.0%, given decelerating GDP growth. In 2015, inflation averaged 1.4%, down from 2.0% the year earlier. Subdued prices mean the government has scope to keep interest rates low to stimulate growth, but at the same time it needs to be mindful of measures that could increase already high debt levels in some parts of the economy, the report says.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.

Media Contact