China's Stabilizing Growth Removes Fed Hurdle, Adds to Debt Pile

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China's Economy: the Outlook for 2016
  • Bloomberg monthly China GDP tracker rose to 6.85% in November
  • Industrial output gains 6.2% last month, retail sales up 11.2%

China’s latest round of data showed fresh evidence of stabilization in the world’s second-largest economy, clearing a potential hurdle for higher borrowing costs in the biggest as Federal Reserve Chair Janet Yellen and her colleagues meet this week.

Bloomberg’s monthly China gross domestic product tracker picked up to a 6.85 percent estimated growth pace for November, the best reading since June, after reports Saturday on industrial production, retail sales and fixed-asset investment all exceeded forecasts.

Unexpected strength in China’s old growth drivers and renewed vigor in new ones help clear the way for the first U.S. interest-rate rise since 2006. China has already cut rates to a record low and boosted fiscal spending -- at the cost of adding to an already record amount of leverage that’s weighing over long-term prospects.

"China’s real economy is stabilizing tentatively at low levels," Wang Tao, chief China economist at UBS Group AG in Hong Kong, wrote in a note to clients after the data release. "The intensification of growth support already delivered and to come (both infrastructure and non-infrastructure related) should underpin near-term economic growth momentum."

Yuan Basket

After six rate cuts since late last year failed to spur a faster expansion and exports posted a fifth-straight monthly drop, the People’s Bank of China is also changing tack. A unit of the central bank signaled Friday that it would reduce the yuan’s link to the dollar and instead value the yuan by tracking it against a broad range of currencies.

Lending gave another sign of stabilization last week as PBOC data showed new yuan loans rose to 708.9 billion yuan in November, up from a 15-month low, while China’s broadest measure of new credit rebounded to 1.02 trillion yuan ($158 billion) for the month.

Saturday’s reports showed industrial output climbed 6.2 percent in November from a year earlier, compared with a 5.7 percent median estimate of economists surveyed by Bloomberg. Retail sales gained 11.2 percent for the best reading of 2015, while fixed-asset investment increased 10.2 percent in the first 11 months of the year.

“The risk of a hard landing remains low,” Louis Kuijs, head of Asia economics at Oxford Economics Ltd. in Hong Kong, wrote in a note. “The macro-policy easing measures taken earlier this year have had a favorable impact on growth.”

Policy makers have added stimulus as growth slowed from 7.3 percent last year to 7 percent in the first half and to 6.9 percent in the third quarter.

Added Stimulus

Saturday’s releases followed others last week showing the yearlong slide in imports is moderating and that consumer inflation is picking up. Policy makers have added stimulus to help maintain medium to high-speed growth while shifting to a more balanced, services and consumption-led economy and away from manufacturing and infrastructure spending.

“Stimulus is gaining traction in stabilizing growth,” Bloomberg Intelligence economists Fielding Chen and Tom Orlik wrote in a report on Saturday. “Resilient numbers from China clear a potential obstacle to Fed liftoff in the week ahead. Stabilizing growth reduces the urgency for China’s policy makers to add to their own stimulus.”

Fed policy makers will gather in Washington Dec. 15-16 for their last policy meeting of 2015. Officials put off a rate increase in September because of growing risks, mainly from China, to their outlook for economic growth and inflation even as they continued to say they were on track to raise the target later this year, meeting minutes show.

Weaker Yuan

As speculation U.S. rates will rise boosted the dollar, the PBOC last week allowed more yuan weakness. On Friday, the central bank’s China Foreign Exchange Trade System unit spurred speculation that policy makers want to reduce the currency’s link to the dollar and let it weaken further.

The new yuan index will be composed of 13 currencies to “help bring about a shift in how the public and the market observe RMB exchange rate movements,” CFETS said in a statement released late Friday.

Loosening the link to the dollar, which has climbed to the highest in more than a decade against major peers, would help support trade for China’s export-dependent economy.

The change “could end up being a significant shift in currency policy,” Mark Williams, the chief China economist at Capital Economics Ltd. in London, wrote in a note. “The timing of this announcement is significant, on the cusp of tightening by the Fed, which could feed further dollar strength.”