Red Dragon On The Road To Recovery

LAST YEAR IT SEEMED AS IF CHINA WAS HEADING FOR ECONOMIC TROUBLE WITH SLOWING GDP GROWTH AND THE GOVERNMENT HAVING TO USE A BIG CHUNK OF ITS FOREIGN CURRENCY RESERVES TO STABILISE THE YUAN. HOWEVER, A YEAR ON, THE PICTURE LOOKS QUITE DIFFERENT.

- Petri Redelinghuys

A year ago, economic trouble seemed to be brewing in the Land of the Red Dragon. The world has changed somewhat since then, with the UK voting to exit the EU, and the US choosing Donald Trump as its new president, leading to a boost in global markets. But have the economic risks in China subsided? We relook some of the issues discussed back then and see if, and how, some of those factors might have changed.

During the first quarter of 2016, Moody’s downgraded China from moderate with a positive outlook to moderate with a negative outlook. One of the major issues at the time was that China’s annual GDP growth rate was falling steadily and had dipped as low as 6.8%. Moody’s had forecast at the time that China’s GDP growth rate would slow to 6.3% in 2016 and 6.1% in 2017.

They, like me, got it wrong. The slowdown that the Chinese economy had been experiencing up to that point was mainly concentrated in the heavy construction, manufacturing and importing sectors. I had speculated that this could put pressure on economies such as our own – which it would, considering that we are heavily resource- and export dependent – as it could lead to continued pressure on commodities prices.

This, however, did not quite play out like Moody’s had expected. Since the first quarter of 2016, Chinese GDP growth rates have seemingly turned the corner. Indicated in the chart on the next page we see that Chinese GDP growth bottomed out at 6.7% and remained there for three consecutive quarters, after which it ticked higher to 6.8%. So this, cautiously optimistically, could signal that the worst is over for China and that we could see a return to growth rates back above the all important 7% in the coming quarters.