Expect China's GDP at 6-4-6.5% in 2016: China Market Research

In what is almost in-line with many market watchers' expectations, China's fourth-quarter gross domestic product (GDP) growth was at 6.8 percent, lowest since early 2009. In an interview to CNBC-TV18, Ben Cavender, Principal, China Market Research Group (CMR) says the market is witnessing what was expected. Going ahead too, he continues to remain conservative and expects China to post growth in the range of 6.4-6.5 percent this year (2016). On People's Bank of China's (PBOC) stance of devaluating yuan, Cavender says the government will try to bring in some more needed stability through the same. However, Ben Luk, Global Market Strategist at JP Morgan Asset Management, says the GDP data is worse than expected and the government needs to do a lot more to boost the over all equity through fiscal as well as monetary policy benefits. With deflationary pressure building and intensifying, it is going to be hard to push it back to 7 percent, he says.The country's recession is too high and makes for a "fast-landing case", Luk says, adding, China is slowing down structurally due to the fading over-capacity and over-investments.Luk further believes that barring the services sector, manufacturing and domestic factors will continue to drag the economy. "It is more important to have the retail and consumption side driving China to have the clean and more sustainable growth going into the future," he adds.In what has been one of the toughest months for the markets globally, there is more volatility to come as risk indicators remain bearish, Luk says.Below is the verbatim transcript of Ben Cavender & Ben Luk's interview on CNBC-TV18.Nigel: What are you making of the reading, more or less in line with your estimates?Cavender: We are seeing what we would have expected to see. I do not think anything is out of line.Ekta: What is the street expecting for this year in terms of gross domestic product (GDP) growth from China?Cavender: Everybody has been a bit conservative this year and they should expect somewhere in mid-6 percent range. Realistically we shouldn't expect that we have seen anything faster than that. The government recognises that there has to be a correction towards slightly slower growth model here and that's really as it should be, so should be expected around 6 percent.Ekta: 6 percent?Cavender: 6.4-6.5 percent.Ekta: 6.4-6.5 percent is your expectation for 2016?Cavender: Yes that's correct.Nigel: Over the last couple of days we have seen some stability come about in the Chinese currency at around 6.55 odd marks. What is your reading of that? Is that likely to percolate to the market on the whole?Cavender: We are going to see currency devaluation going forward and we are probably going to see the government trying to keep a bit more stability going forward. They are going to try and kicks some jitters out of the market here. If the currency is more stable then that should help the market in China. Obviously at the beginning of the year has been extremely rough for a lot of markets but if things stabilise here in China, it should make it easier for other countries in terms of currencies.Latha: How do you read the Chinese numbers and more importantly how will global equity markets read the Chinese GDP numbers?Luk: The GDP numbers have been slightly worse than expected at 6.8 percent, but more importantly, if you look at the equity market today, not a lot of actual buying and selling overall. More importantly most people are looking at the monthly indicators instead; the industrial production numbers definitely came out to be weaker than what we expected at 5.9 percent. Overall if you look at the composition, it remains to be this drag that we are seeing from overcapacity from the manufacturing as well as real estate sector but the service industry is holding good, retail sales are slightly lower than expected at 11.1 percent but still saw double digit growth in retail sales, continues to indicate towards that China remains to be on the speed economy but definitely the slowdown that we have seen till last quarter, provides extra boost for central bank to implement further quantitative easing measures either through lowering reserve requirement ratios as well as low interest rate to boost Chinese economy and stabilise in the near term.Latha: But that near 5 percent cut that we saw across all equity markets, didn't that factor in the Chinese slowdown or is there more to be factored?Luk: I think people are right now pricing in a recession that is too high for China. I think most people are now pricing in hard landing scenario much more than soft landing scenario. Our base case scenario remains to be that this is going to be a soft landing case. Yes, China structurally will continue to slowdown in 2016. We are going to expect closer to 6.5 percent in 2016 comparing to 6.9 to 7 percent this year but more important is the cleanness of that growth; you have overcapacity, overinvestment in previous manufacturing sector--that story is going to be fading out soon. It is more important to have the retail and consumption side driving China to have the clean growth that you can have more sustainable growth going into the future.Sonia: You are saying that the GDP is worse than expected and the policymakers can do something aggressive but the Chinese central bank has cut interest rate six times since November 2014, they have reduced the amount of cash that banks must keep as reserves. One wonders what more can they do to jumpstart the economy. Do you get a sense that whatever steps that they take hereon, it would be hard for China to get above 7 percent in the near term?Luk: It is going to be hard to push it back up to 7 percent. You are completely correct by saying that the previous rate hikes that we have seen didn't lower the real lending rate. I think the deflationary pressure in China is building an intensifying in the last yearend. However, more importantly China needs to combine the monetary policy along side with the fiscal policies in order to stabilise the economy. If you look back at the companies that have been dragging growth down has been that of manufacturing, the central prices, you have to implement reforms to have a higher productivity to increase the dividend payout to booster overall return on equity that is going to help the funding overall in China to be geared towards more productive firms rather than still holding what we call as 'zombie firms' because those are the ones that are draining the overall growth in China. So it is a combination of both the monetary and the fiscal that need to work together in order to stabilise growth.