China rebalancing continues, but debt risks rise

Subject

The macroeconomic outlook for China.

Significance

GDP grew by 6.7% year-on-year in the first quarter of 2016 to almost 15.9 trillion renminbi (2.4 trillion dollars), the National Bureau of Statistics (NBS) reported on April 15. Over-reliance on investment and policy stimuli are carrying the economy, with only a slow structural rebalancing towards demand needed for long-term sustainable growth. Mounting debt is of immediate concern for the corporate and financial sectors, and for the outlook this year, the first in the 13th Five-Year Plan period.

Impacts

• Markets will be especially sensitive to data releases and policy signals, making for more volatility.
• The possibility of a US rate hike complicates China's efforts to hold its interest rates down while controlling outflows.
• Conversion of debt into bonds and some relaxation of social security contribution requirements should take some pressure off localities.