2016 will be the first year of China's macroeconomic continued bottoming out and the most difficult year in the near term. Various macroeconomic indicators will further decline, and micro-level operational mechanisms will undergo further changes. 2016 is a year of continued bottoming out for China's economy. On one hand, many macroeconomic indicators will see further declines; on the other hand, many micro-level indicators may undergo comprehensive changes, causing the depth and duration of the economic bottoming to exceed expectations. It must be clear that the bottom of this round of China's economy is the product of multiple cyclical forces. Will the world economy experience a double-dip recession in 2016? Will real estate investment successfully reverse in the second quarter of next year? Can China's debt restructuring alleviate corporate debt pressure? Can China's stock adjustment be launched on a large scale? Is incremental expansion sufficient to fill the gaps left by unbalanced reversals and traditional stock adjustments? Can the repositioning of macroeconomic policies effectively change the pessimistic expectations of micro-entities and effectively resolve the full manifestation of the "deflation-debt effect"? Will an incentive-compatible dynamic mechanism for a new round of major reforms and adjustments be effectively constructed? These factors will together determine the bottom of China's economic downturn, as well as the depth and duration of the bottom.

  1. In 2016, the world economy will find it difficult to escape the downturn of 2015.

First, the normalization of US monetary policy, the further decline in China's import demand, the continued decline in international commodity prices, and the manifestation of deep-seated problems from previous misallocation in global manufacturing all determine that the turmoil in emerging economies in 2016 will surpass various fluctuations they have faced before. Second, unexpected geopolitical shocks may derail Europe's economic recovery. Third, the global contraction in investment and trade has not ended; the world macroeconomy not only lacks coordinated macroeconomic policies but also lacks the growth foundation for a rebound and the fundamental support for medium-term prosperity. Fourth, the transmission pattern of world crises determines that the transmission of this crisis from finance to real economy and from center to periphery has not ended; the balance sheet adjustment of emerging economies has just begun.

Therefore, the world economy not only faces overall continued downturn but also the possibility of a "double-dip recession." This determines that China will face not only the sustained impact of world trade contraction but also the impact of global capital movements. It is difficult for China's economy to achieve a cyclical reversal before the world economy bottoms out.

  1. China's stock adjustment has not yet been substantively launched; overcapacity in industries has not fully exited; various zombie enterprises as capital black holes still exist widely; highly indebted state-owned enterprises, under the snowball effect, remain the focus of various capital injections... Therefore, the supply-side stock adjustment policies fully launched in 2016 will determine the bottom of stock operations and the timing of rebound. If the bottom of the stock economy does not appear, the bottom of the overall economy will not arrive.

  2. Excessively high inventory and excessive regional differentiation have made China's real estate cycle adjustment longer than before, with the risk of recovery aborting. The expectation of a comprehensive real estate recovery in 2016 has strong uncertainty, but the upcoming stock real estate inventory policy will significantly reduce this uncertainty and bring forward the reversal of real estate investment growth. Without a reversal in real estate investment growth, short-term economic stabilization is difficult to achieve.

  3. Incremental adjustment has achieved notable results in recent years, but the cultivation of new industries, new business forms, and new drivers requires a longer cycle and cannot fully fill the gap left by the transformation of traditional forces in the near term. The continued intensification of incremental adjustment in 2016 faces constraints from government fiscal expenditure on one hand, and the risk of bubble formation from excessive support on the other.

  4. The debt cycle is the most direct force determining this round of China's economic cycle. The stock market crash in June-July 2015 accelerated the rise in China's debt ratio. In 2016, the full restart of IPOs, the accelerated replacement of local government debt, and the stripping and disposal of non-performing assets will directly determine the state of China's debt cycle. If the debt dilemma is not broken and the capital black hole is not eliminated, a sound operating mechanism for medium-to-high-speed growth in China's macroeconomy will be difficult to emerge.

  5. The lack of an incentive-compatible dynamic mechanism for a new round of major reforms and adjustments is the deep-seated core reason for the continued economic decline. Whether the repositioning of major reforms and adjustments in 2016 can construct a new round of incentive-compatible dynamic mechanisms is key to China's macroeconomic bottoming out and rebound. Based on the above qualitative judgments, using Renmin University of China's China Macroeconomic Analysis and Forecasting Model (CMAFM), the main macroeconomic policy assumptions are set:

(1) The actual fiscal deficits for 2015 and 2016 are 1.6 trillion yuan and 2.1 trillion yuan, respectively;

(2) The average exchange rates of RMB to USD for 2015 and 2016 are 6.21:1 and 6.50:1, respectively. The annual forecasts for China's macroeconomic situation in 2015 and 2016 are shown in Table 1.

  1. In the second half of 2015, under the effect of various "stable growth" policies, the trend of rapid macroeconomic decline in the first half was changed, and it gradually stabilized in the fourth quarter. However, due to persistently weak external demand and the weakening of policy stimulus effects, the foundation for stabilization is not solid, and the overall macroeconomic situation remains weak. It is estimated that the annual real GDP growth rate will be 6.9%, down 0.4 percentage points from 2014, basically achieving the government's predetermined economic growth target. However, due to the GDP deflator being -0.5%, the nominal GDP growth rate is only 6.4%, and the nominal industrial added value growth rate is only 0.2%, down 1.8 and 4.7 percentage points from 2014, respectively. The overall difficulty of the economy is greater than the actual growth rate shows.

  2. From the supply side, under the sustained impact of industrial depression, the decline in the secondary industry has further widened, while the tertiary industry has risen against the trend with relatively strong growth. It is estimated that in 2015, the added value growth rate of the secondary industry will be 5.9%, down 1.4 percentage points from 2014; the tertiary industry growth rate will be 8.2%, up 0.4 percentage points from 2014; the primary industry, supported by various agricultural policies, will remain relatively stable with an added value growth rate of 4.0%. It is worth noting: First, in 2015, the current-price added value growth rate (or nominal growth rate) of the secondary industry is only 0.6%, and both industrial main business revenue and profits have entered a "negative growth period"; Second, the core reason for the increase in the real growth rate of the tertiary industry is the rapid growth of the financial industry. Excluding the financial industry, the service industry growth rate is only 6.7%; excluding finance, the real GDP growth rate is only 6%, and the nominal GDP growth rate is only 5.5%.

  3. From the perspective of aggregate demand, all three major demands show a weak trend, with investment and export growth declining more noticeably. First, the growth rate of total fixed asset investment in the whole society continues to decline due to weak manufacturing and real estate investment, estimated at only 10% for the year, down 5.7 percentage points from 2014. Second, under the influence of global trade contraction and domestic investment decline, both export and import growth rates have declined significantly. It is estimated that in 2015, export growth will be -1.3% and import growth -12.0%. This asymmetric decline leads to a trade surplus of 3,606.9 billion yuan (580.8 billion USD) for the whole year of 2015, an increase of 53.6% over 2014, and its share of GDP rises from 3.7% in 2014 to 5.3% in 2015. The expansion of this recessionary surplus indicates that China's internal imbalance has further deteriorated. Third, consumption remains relatively stable. It is estimated that total retail sales of consumer goods in 2015 will grow by 10.6% year-on-year. Compared with 2014, the nominal growth rate will decline by 1.4 percentage points, but the real growth rate after removing price factors will only decline by 0.8 percentage points.

  4. Under the influence of multiple factors such as supply-demand imbalance and imported deflation, the price level in 2015 declined noticeably. It is estimated that the annual CPI growth rate will be 1.4%, down 0.6 percentage points from 2014, far below the policy target of 3.0%. It is worth noting: 1) In 2015, the GDP deflator was negative, with an annual year-on-year growth rate of -0.5%, down 1.3 percentage points from 2014; 2) Deflation in the industrial sector further deteriorated and showed a spreading trend. The annual PPI in 2015 was -5.2%, down 3.3 percentage points from 2014; 3) Service prices and core CPI declined slightly, down 0.5 and 0.1 percentage points from 2014, respectively.

  5. The prudent monetary policy continued further, but under the pressure of endogenous contraction of funds, the gap between money supply growth and total social financing growth widened significantly, and the penetration of liquidity into the real economy further declined. It is estimated that M2 growth will remain at 13.3%, and total social financing will be 15,192.6 billion yuan, with a growth rate of -7.7%. The situation of "wide money, tight financing" further deteriorated.

  6. Under the influence of real estate depression, industrial depression, and significant declines in imports and exports, Chinese government revenue is expected to see a -2.2% growth in 2015, with fiscal pressure rising across the board. 2016 will be the first year of China's macroeconomic continued bottoming out and the most difficult year in the near term. Various macroeconomic indicators will further decline, and micro-level operational mechanisms will undergo further changes. This will bring opportunities for China to carry out substantive stock adjustment, comprehensive supply-side reform, and more substantial demand-side expansion, thereby laying the foundation for the reversal of the economic cycle in 2017 and the normalization of medium-to-high-speed economic growth.

  1. It is estimated that the real GDP growth rate in 2016 will be 6.6%, down 0.3 percentage points from 2015. However, since the GDP deflator is only -0.1%, the nominal GDP growth rate in 2016 will be 6.5%, up 0.1 percentage points from 2015. Among them, the growth rate of the primary industry will be basically flat; the secondary industry growth rate will be 5.4%, down 0.5 percentage points from 2015; the tertiary industry will decline slightly to 8.0%.

  2. In 2016, fixed asset investment will continue to decline, with an estimated growth rate of 9.6%. However, considering price effects, the real growth rate will be basically the same as in 2015.

  3. In 2016, consumption will remain stable, with an estimated growth rate of 10.3%, slightly lower than in 2015.

  4. With the transmission of the world economic crisis, intensified turmoil in emerging economies, and weak recovery in Europe and Japan, China's external environment will remain sluggish in 2016. However, due to base effects, the annual trade growth rate will rebound. It is estimated that export growth in 2016 will be 2.1% and import growth 1.1%. The trade surplus will be 3,789.2 billion yuan (582.9 billion USD), an increase of 5.1% over 2015.

  5. With sluggish global demand, the continuation of the super commodity cycle, and various geopolitical influences, the pressure of imported deflation will persist. Combined with the decline in domestic demand, the price level in 2016 will remain relatively depressed. It is estimated that CPI will be 1.3%, PPI negative growth will narrow significantly, and the GDP deflator will be -0.1%.

  6. Fiscal problems caused by the economic downturn will further deteriorate. It is estimated that in 2016, under the continued deterioration of fund income, government revenue will grow by only 2.1% year-on-year. -END- Content Selection Click on the title below to read directly: [Line Sales Representative Practical Operation Guide (with full PPT download attached)