China’s economic performance continues to disappoint the world. The Caixin manufacturing and service PMIs were both lower than 50 in December, indicating pessimism in business circles about 2016. On top of that, expectations of a devaluation of the RMB are mounting in the offshore market. This year will be likely to be the most difficult for the Chinese economy since 1998.
Since 1992, China’s economy has experienced four boom and bust cycles, each lasting for roughly seven years. The first was a boom lasting from 1992 to 1997. This was followed by a bust between 1998 and 2003. Then, the economy entered a period of hyper-growth which was not derailed by the global financial crisis thanks to China’s massive stimulus measures. As a result, it also lasted slightly longer than seven years and did not stop until 2012. Since then, the economy entered another bust cycle. If the seven-year rule still holds, then 2016 should be the bottom of the bust cycle.
The Chinese government, after its most recent meeting on economic issues, announced five measures to deal with the slowdown in 2016: getting rid of redundant capacity; reducing inventories; deleveraging; reducing the costs of manufacturing; and strengthening the weak parts of the economy. These measures are consistent with the supply-side reform agenda set earlier by the party. The first three are intended to bring about real structural adjustments to the economy. This won’t be easy and, if carried out properly, will involve some pain. The last two measures are designed to strengthen the supply capacities of the real economy. In the long run, those measures will help China embark on a healthier growth path.