China's 'V' for recovery ahead

The scope of the country's economy does mean it will take time to adjust to this new normal, however. The government has placed great emphasis on reforms but will still attempt to stabilise growth.

" We expect China's GDP will see a V-shaped rebound in 2018 once the reform dividend materialises."
Raymond Yeung, Chief Economist Greater China, ANZ

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Chinese GDP is forecast to rise by 6.4 per cent in 2016 and drop further to 6.0 per cent in 2017. The latest reading puts it at 6.9 per cent, although it appears inconsistent with traditional indicators.

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Financial sector reform, interest rate liberalisation and exchange rate reform are bound to induce market volatility but the chance of a financial crisis or hard landing remains very small in our view.

Moreover, we expect China's GDP will see a V-shaped rebound in 2018 once the reform dividend materialises.

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REBALANCE

With this new normal comes an economic rebalancing. China's service sector and consumption will assume a bigger role and already services are outpacing manufacturing (and net exports). The share of consumption in economic growth has also outpaced investment.

Industries running at overcapacity have been the hardest hit. Imports of natural resources have slowed and commodity prices are faced with downward pressure. But underlying these more visible factors, an industrial revolution is underway as promoted through Chinese initiatives like “Made in China 2025” and “Internet+”.

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The financial position of state-owned enterprises and governments in China remain sustainable but credit risk in some sectors and individual enterprises has heightened.

Ongoing urbanisation efforts and increased infrastructure spending will continue to underscore solid demand for commodities. However, it will take one or two more years for China's property sector to de-stock, limiting the demand for real estate construction.

Raymond Yeung is a senior economist at ANZ. This story is an edited version of a webinar presented by Yeung for ANZ. You can see the webinar for free here.