What are the expectations for China when it reports its 4Q 2013 Gross Domestic Growth (GDP) figure and the future outlook for economic growth in the next few years?

The Chinese government is due to release its Gross Domestic Product (GDP) for the fourth quarter of 2013 at approximately 1000 hrs (Hong Kong/Singapore time) on January 20, 2014. The expectations taken from a poll of economists by Thomson Reuters calls for economic growth for the quarter is expected to come in at around 7.6 percent. Other economic reports scheduled to be reported later include payrolls, industrial production and retail sales data. A chart showing the GDP trends on a year-over-year (yoy) basis is as follows:

Chart showing China GDP growth on a year-over-year basis  - January 20 2014

Source: Thomson Reuters MetaStock.com

There are many macroeconomic forecasters calling for the fourth quarter GDP growth in China to stay positive at approximately 7.5 percent to 7.8 percent. The fourth quarter growth figure could also be partly impacted by a low base when comparing to the same quarter in 2012, but the growth outlook for 2014 and beyond is what matters most importantly for many investors as China’s economic growth outlook of 7.0 percent to 7.5 percent in 2014 is perhaps the slowest seen for the past 24 years.

The Chinese government policy makers have been focusing on sustainability and quality of growth under the new leadership of President Xi Jinping, and Premier Li Keqiang, however risks continue to pop up regularly including the stubbornly high property prices, massive growth in credit, ongoing issues with the shadow banking system, local government debt, environmental degradation, growing disparity among the rich and poor, government corruption, lack of corporate transparencies among corporations, among others. The world’s second largest economy is being closely monitored by many, as it forms part of the engine for global economic recovery following the financial crisis in 2008-2009, slow growth in Europe and other developed economies.

A read of many analysts interviewed on Bloomberg Television during the early Asian trading hours on Jan 20 indicated a wide consensus that the slow economic growth seen in China is inevitable given that policy makers have now shifted its reform agendas towards maintaining sustainable economic progress, rather than emphasising solely on gross domestic product (GDP) alone. Many local governments have adopted other measures of economic growth including measuring the impact of environmental pollution, and focusing on wealth distribution; however, they are also facing tightened pressure from the Central Government to do more in boosting the growth momentum, rather than to sit on their laurels and pretend that slow economic growth is entirely acceptable by the Chinese leadership. This has sometimes caused some frictions among local government officials, and it also creates conflicts as to how to balance growth with the quality of growth, including education reforms, welfare distribution, among others.

Most of the market professionals have also warned of several risks that a slowdown in economic growth in China will likely create distortions to the economy including the co-called ‘shadow’ banking system rising household debt, and a property boom which many Chinese market watchers warned that if home prices remain in the unaffordable levels, there could be growth local discontent, and potential civil strife among its people over the rise in cost of living. Incidentally, it was reported in the online version of local Chinese news portal, the Caijing Magazine on January 17, 2014, that there were some market reports that a Chinese trust company, known as China Credit Trust Co., has warned investors of a high-yield product, that it might not be able to repay them when it expires on January 31, 2014. The monetary sums in focus for this transaction amount to approximately 3-billion yuan (USD 496.0 million). The potential fallout from this default scenario by a major trust company could be unprecedented, as it is likely to cause ripples throughout the entire financial system in China, and might also result in global markets feeling increasingly jittery over the level of transparencies in China’s credit markets. There are also questions as to whether the Chinese government will step in to bail out the shareholders, as the country has not suffered a large-scale public default, and should a default occurs, it will likely shift many peoples’ assumptions of state guarantee of products sold within the ‘shadow’ banking system.

As investors await for the impending release of China’s latest fourth quarter 2013 GDP data and other economic reports, I do believe that no matter what the outcome of the GDP data is, the Chinese economy will be heading towards a more sustainable pace of economic growth in 2014 and beyond, and will unlikely return back to the days of 10.0 percent growth and above. I think that the Chinese government is now starting to embrace slowing economic growth, crafting its reform agendas that will focus on how to ensure that the Chinese people remain in harmony, and enjoy the fruits of success that they have been contributing throughout the decades since the late Premier Deng Xiaoping embarked on undertaking major economic reforms that seek to open up China to foreign investments, and becoming one of the leading global trading hubs.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc