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China’s economic transition shows promise in 2016

26 Apr 2016

China’s economic growth will be higher than expected in 2016 as the country makes its transition from a manufacturing-based economy.

While the overall pace of growth will be slower than in recent years, Macquarie Research shows emerging sectors such as technology and tourism will begin to fill the gap left after the manufacturing boom.

Erwin Sanft, Macquarie Securities Head of China Strategy, says China’s government will also be focused on stabilising growth ahead of the mid-term retirement of half of the Politburo in 2017.

“There’s now a desire to ensure growth is stable. Stability of growth this year is at least as important as structural reform,” Sanft says.

“We’ve been in a multiyear slowdown but at least for the first half of this year we’ll see growth figures in China that are better than expected."

“We’re expecting growth this year of 6.7 per cent for China.”

Sanft says the level of investment through the economy will be key to delivering this.

Manufacturing is on the downturn but he says two areas – infrastructure and housing investment – show more promise.

There’s now a desire to ensure growth is stable. Stability of growth this year is at least as important as structural reform.

Credit toward new infrastructure amounted to $US2tn in 2015 but Macquarie says that figure will have to grow by 15 per cent in 2016 to act as a growth buffer.

Sanft says real estate is the other area where there has been a positive surprise after China lowered transaction taxes and the down payment required from first time property buyers in February 2016.

“We’ve seen a strong recovery in the property market in China’s major cities, so we anticipate an uptick in the investment cycle for real estate,” Sanft says.

As China’s economy becomes more consumption and services-focused, new structural trends are coming in to play.

A wave of consolidation is expected across the economy after the boom years in manufacturing and property construction saw the emergence of too many businesses in these sectors.

Companies that are globally competitive are also likely to emerge.

Technology is encouraging businesses to become more innovative and many are now turning their sights to expanding overseas, however the level of state ownership remains an obstacle to this goal in some industries.

Sanft says the transition in China has seen the emergence of so-called “new economies” in the technology and services-driven sectors, which are experiencing healthy growth and represent the future for the country’s economy.

“Even though China will be growing at a slower pace, sectors like the internet, healthcare, tourism, non-bank financial services, these are all interesting areas and there’s a lot of growth in these parts of the economy,” Sanft says.

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For a full copy of the “China Strategy – Year of the Eagle”  report please contact your Macquarie Representative.