China Economy


Mainland China’s economic growth could drop as low as 3.7 per cent, but it’s not very likely

Bank of America Merrill Lynch says probability of hard landing about 5 per cent

PUBLISHED : Tuesday, 16 February, 2016, 9:15pm
UPDATED : Thursday, 25 February, 2016, 3:29pm

Mainland China’s gross domestic product growth could slow to as little as 3.7 per cent this year in a worst-case scenario outlined in a detailed report by Bank of America Merrill Lynch.

It comes after billionaire investor George Soros said last month that a hard landing for the Chinese economy was “inevitable”, due to rapidly expanding debt.

“I’m not expecting it, I’m observing it,” he told Bloomberg. “China can manage it. It has resources and greater latitude in policies, with US$3 trillion in reserves.”

But how likely is a catastrophic plunge in the mainland economy? Should investors be expecting an imminent plunge in the world’s second-largest economy?

In response to Soros’s remarks, mainland state media outlets, including the Communist Party mouthpiece People’s Daily and the state news agency Xinhua, hit back hard. “Why are so many Western pundits and media outlets so intent on talking China down?” the Global Times asked last month.

Still, economists are not saying it is not impossible. A report by Bank of America Merrill Lynch this month laid out a series of projections for mainland economic growth, depending on the actions taken by government and how the global economy behaves.

At a base level, with weaker investment and continued growth in consumption across the mainland, the report estimated mainland China’s GDP would grow by about 6.6 per cent this year and by 6.5 per cent next year.

Of course other things may turn worse such as external demand being weaker than expected, potentially combined with global financial market turmoil
Helen Qiao, Bank of America Merrill Lynch

Bank of America Merrill Lynch China and Asia economist Helen Qiao said the central government would not release its official growth target for this year until at least March.

“We’re expecting a potential resetting of the target to 6.5 to 7 per cent, so if that’s the case we’re still within the range,” she said. “I’m not suggesting we’re going to see things that are much more dramatically different – this is largely an extension of the previous year.”

But things could get much worse. In the report’s hard-landing scenario for the mainland, similar to Soros’ prediction, growth could slow to as low as 3.7 per cent year on year.

“We think a worse scenario has probably about 20 per cent likelihood, while a hard landing is still a very low probability of around 5 per cent,” Qiao said. “Is the hard landing inevitable? All probability says it is not.”

The report’s authors say weaker-than-expected external demand or a sharp drop in property sales in first- and second-tier cities could trigger an economic slump.

Qiao said faster-than-expected excess capacity reduction without countercyclical support could also spell trouble for the mainland Chinese economy.

“Of course other things may turn worse such as external demand being weaker than expected, potentially combined with global financial market turmoil,” she said.

Just as demand could slump and the economy could go into free fall, there was also a possibility growth might be stronger than expected. In a better scenario, Bank of America Merrill Lynch saw growth potentially remaining at 7 per cent.

A research paper released by Bank of China International earlier this month highlighted moves by the State Council, led by Premier Li Keqiang, to stimulate employment expansion at its meeting on February 4.

“The central government is now focusing heavily on stabilisation of employment and investment growth during the process of overcapacity reduction,” the report said. “More support and fiscal policies will be unveiled to meet the challenges such as creating new jobs for workers laid off by traditional industries.”

The report’s authors predicted mainland China’s GDP would grow by about 6.3 per cent this year.

Looking towards 2017, Qiao said depending on the policy outcomes and announcements, a new forecast would need to be made towards the end of this year.

“I think we can see some of the risks [to the economy] that we highlighted, and other analysts highlighted, could materialise and become a threat, but we think that other types of analysis aren’t based on actual numbers and rather on pretty generalised assumptions,” she said.

“I think there is a still a fine difference between a potentially likely outcome and just going out there and saying, ‘sure, this may happen’.”