For China’s struggling economy, 2016 may be worse than 2015

China is closing out 2015 with probably the weakest growth rate in a quarter of a century. Unfortunately, 2016 will be more difficult. Financial bubbles have kept afloat unviable companies and speculative spending. But, as the renminbi comes under increasing devaluation pressure, the resulting capital outflows may deflate these bubbles despite the strong support from official propaganda.

Nothing reflects better China’s economic difficulties than the collapsing commodity market. After a 15 per cent decline in 2014, the CRB index dropped another 27 per cent in 2015. China-dependent iron ore has seen its price halved again in 2015 after halving in 2014, and the price of Brent crude is down by two-thirds in 15 months.

Financial markets have been hoping for a government stimulus to reverse the trend whenever disappointing numbers are released, even though such hopes have been dashed again and again for the past three years. The pattern is likely to persist into 2016. The government has tried monetary stimulus, a stock market bubble, and now a bond market bubble. Nothing has worked.

China’s economy is mired in a structural and cyclical quagmire. To extricate itself, China must develop a comprehensive plan to stabilise the economy, absorb cyclical losses and rebalance the economy. Piecemeal measures only increase confusion and dig a deeper hole for the future.

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To improve the short-term economic outlook, the only effective measure is to shift income to the household sector by decreasing contributions to social welfare funds, and cutting consumption and income taxes. The shift must be over 3 per cent of gross domestic product. For example, the contributions to social welfare and insurance funds should be cut by half for three years.