BEIJING — Despite the consensus that China’s economy will continue to lose steam in 2016, economists forecast that consumer sentiment will remain surprisingly resilient over the next 12 months.
While shoppers in the world’s second-largest economy may shift spending habits, many “still think next year will be better,” Francis Cheung, CLSA’s head of strategy for China and Hong Kong, said, adding that even though wages aren’t going up, savings rates remain high in China.
“They still want to spend more,” Cheung said, adding top big ticket purchases for 2016 include travel, in particular to Asian cities; automobiles; education, and home appliances. “The majority of consumers [surveyed] said they will increase spending on basics and upgrade brands.”
This may come as moderately welcome news for retailers struggling to find their way in a country where the government is working to wean an economy away from years of unbridled growth to GDP expansion that is more sustainable, or what Chinese leaders call the “new normal.”
Earlier this month, a government report forecast 2016 growth to come in at around 6.5 percent. For the third quarter of 2015, growth slowed to 6.9 percent, its weakest pace since 2009. Top leadership has said in recent weeks that China’s annual growth rate is still on target for 7 percent this year.
Even with somewhat upbeat consumer sentiment, the outlook for 2016 is not positive, with economists projecting it will take at least another year, possibly even two, for China’s economy to stabilize. Areas of concern for next year include overcapacity in the country’s manufacturing sector; declining property sales, and continuing volatility in stock markets, which, despite heavy-handed government intervention, lost trillions of dollars in value in recent months.
“It will take at least two to three years for the economy to be on a more stable path,” Cheung said. “I think you’ll see relatively volatile markets in 2016. At this point in time I would be particularly cautious.
“Deflationary pressure is still high,” he added.
Economists forecast the Chinese yuan to continue to depreciate against the dollar. But they do not see the government’s ongoing moves to devalue the currency as a mechanism solely to boost foreign exports, but rather to prevent it from going into free fall. The currency has been under pressure from capital flight and interest rate cuts. On Monday, the yuan, or renminbi, weakened for the sixth consecutive day to 6.4495, its lowest level against the dollar since July 2011.
Even though a number of luxury brands are making moves to adjust prices in China so products are more competitive with other markets, the depreciation of the currency makes imported goods more expensive. In a move to boost domestic consumption, and possibly offset effects of a weakened currency, China’s finance ministry unveiled plans last week to cut import duties on a list of 800 consumer products, including bags, sunglasses, suitcases and scarves, by Jan. 1.
China’s central bank, the People’s Bank of China, said in an editorial published online on Friday that it plans on valuing the yuan against a broader basket of currencies rather than pegging it to the dollar alone.
“I think the Chinese government is targeting the euro,” Cheung said. “By following the euro, the [yuan] will be able to maintain its competitiveness. The euro could fall by 6 percent next year and the [yuan] will likely follow that.”
China’s vast manufacturing sector presents more red flags.
Cheung forecasts China’s Purchasing Managers Index, or PMI, which measures the health of the manufacturing sector, will hover below 50 for the first half of next year, which indicates contraction. There may be improvement toward the middle of 2016, he said.
It is hard to generalize about the health of China’s manufacturing base as some sectors are performing better than others. One trend that emerges is overcapacity and excess inventory, as well as sluggish investment in sectors ranging from heavy industry to textiles and footwear.
A quick recovery in China’s industrial economy is unlikely, according to Gan Jie, a finance professor at the Shanghai campus of the Cheung Kong Graduate School of Business.
“[The] problems are structural and fundamental,” Gan, who conducts a quarterly survey of the operating environment of thousands of manufacturers, said during a presentation of her findings last week in Shanghai.
Gan’s latest study found that 70 percent of firms surveyed reported a lack of orders as the most serious concern, followed by labor and raw material costs. As many as 56 percent of firms surveyed indicated their supply exceeded demand. The majority surveyed reported margins below 15 percent. Further, the business sentiment index for the third quarter of 2015 came in at 47. Similar to PMI, figures below 50 indicate contraction.
“Overcapacity really is a problem and what is worrisome is it has worsened in the past two quarters,” Gan said. “It is going to be a problem for a while and there is no quick fix. The Chinese market is not a market that should be given up on, but on the other hand there are still some difficult years down the road.”
Loosening monetary policy will not help solve the problem, as manufacturers are not planning new investments, Gan said, adding that the number of firms making expansionary investment in the past three quarters is “alarmingly low.”
“Financing is still not a bottleneck for industrial growth at this stage,” she said. “The government should focus on long-term policies to improve domestic demand and to encourage industry upgrade and technological innovation.”
Yet Gan noted that while overcapacity is serious, excess inventory poses less of a threat as many manufacturers are producing orders as they are placed rather than operating at full production. “Only three percent of firms with excess inventory say it will take more than a year to absolve,” she said.
Economists say real estate investment is likely to turn to negative growth in the coming 12 months as developers struggle to offload an oversupply of new projects in second- and third-tier cities.
Ongoing volatility in stock markets will likely continue as Beijing allows the resumption of initial public offerings, which were halted during the market free fall over the summer. The government said that next year it will implement a circuit breaker system to freeze trading to fend off panic if indices fall below a certain level.
“If the government can implement the circuit breaker properly, it will be OK,” Cheung of CLSA said. “But if they hang on to it longer than they should, which is a possibility, they will just be impeding market forces rather than impeding volatility.”