China

China: a new normal

China’s economic performance has been excellent in the past few years and the EPI grades its current economic performance at A level, with the EPI score projected to be close to 99.1% in 2016. China is transitioning to a “new normal” growth model, with slower yet more sustainable growth rates of the economy and credit.

China’s “hard landing” remains a risk but the government’s monetary and fiscal stimuli are likely to ensure that the slowdown is gradual. Lower growth would eventually lead to lower corporate profits and lower dividends, negatively affecting stock prices. The stock market crash in the second half of 2015 was a reason for investors to re-price the growth potential of the Chinese economy.

GDP growth is projected to decelerate to 6.3% in 2016 from maximum of 10.6% in 2010 on the back of slower investment, especially in real estate. The labor market has remained resilient despite slower growth, as the economy pivots toward the more labor-intensive service sector. The official unemployment rate is likely to remain flat at 4.1%, despite economic slowdown. Fiscal policy has been accommodative and continues to be impacted by off-budget activity, with budget deficit projected to increase to 2.3% of GDP this year from 1.9% in 2015. As of end-201, general government (with off-budget activity) deficit rose to around 57% of GDP. Inflation is projected to be 1.5% this year, on the back of lower commodity prices.

The 5-Minute Economist projects China’s EPI score to gradually decelerating in the medium term from almost 100%, or an A grade, currently to 97.5%, still a solid A level, by 2020. The major drivers for slowdown in the EPI score the medium term are projected to be lower GDP growth that is projected to stabilize at 6.3% by 2020 and some acceleration in inflation to 3%, consistent with these growth rates. Changes in unemployment rate are unlikely, and budget deficit is likely to stay close to 2% a year.