China Economic Impact: Reflections on Reforms

Despite a challenging external trade environment and domestic stock market turmoil, the Chinese economy still managed to grow at 6.9% in 2015. And though the year was dogged by investor’s concerns of an economic hard landing, there were and are quite a few bright spots in the economy. For example, the labor market is strong because of a booming service sector which is being propelled by the transformation of the economy and consumers' desire for upgrading certain 'big-ticket' items (e.g., cars). Contrary to the many gloom and doom scenarios doing the rounds during the first half of last year, the housing market has shown itself to be surprisingly resilient, with first tier cities even seeing significant price increases thanks to a healthy pent-up demand and an ultra-low consumer leverage (consumer debt/GDP at less than 40%). Our base-line scenario on the residential housing market is that the price levels in 1st and 2nd tier cities will hold up well in 2016 -- despite a general economic slowdown.

Compared to the previous year, 2016 is expected to be a far more challenging year for China, but the Chinese Government still has many tools in its tool box. The key issue is whether China will be able to implement certain reforms amidst persistent economic deceleration. In addition, policy mix and policymakers' communication with the market would be crucial in 2016 (hence People's Bank of China Governor Zhou Xiaochuan long-awaited interview on the exchange rate during the Chinese New Year holidays).

Xu Sitao
Deloitte China Chief Economist, Partner