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Seeing red

19 January 2016 By Peter Thal Larsen

China’s soothing growth numbers are no balm for nervous investors. Official data show the world’s second-largest economy expanded by 6.9 percent in 2015, exactly as expected. That predictability contrasts sharply with the recent China-driven slide in global markets. But then, the numbers do little to ease concerns about the weak yuan or the country’s ever-increasing debt pile.

Headline statistics support the government’s assertion that the People’s Republic is experiencing a steady but manageable slowdown. While the traditional drivers of growth, such as manufacturing and investment, are slowing, Chinese consumers are picking up the slack: consumption accounted for two-thirds of growth in gross domestic product (GDP) last year.

For many, the numbers are just another reason to be wary of official Chinese statistics. Other figures suggest a more severe deceleration. For example, power generation suffered its first full-year decline since 1968.

Yet doubts about Chinese data have been around for years. Nothing has changed this year. A more likely culprit for the worldwide selloff is the weakening yuan, and fears that there is further depreciation to come.

Though Chinese officials insist the renminbi’s value will remain broadly stable against a basket of other currencies, their reassurances jar with signs that Chinese investors are trying to move money out of the country. A further devaluation that also leads to weakness in other emerging market currencies would be a blow to growth in the euro zone and Japan, according to Oxford Economics.

Meanwhile, investors are increasingly worried about Chinese officials’ grip on the financial system. This matters as planners grapple with the country’s mounting debt pile. Despite talk of deleveraging, the stock of outstanding credit increased by more than 12 percent last year, according to BNP Paribas – far ahead of the expansion in nominal output.

China’s state-controlled and relatively closed financial system should give planners more scope to avert a messy debt meltdown. But their bungled efforts to prop up the Shanghai and Shenzhen stock markets – while of little consequence to the broader economy – have undermined confidence in China’s financial bureaucracy. That is something supposedly reassuring data cannot restore.


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