China Macro:4Q2015GDP,Another year of muddle-through

China released Dec and 4Q activity data today. GDP growth slowed to 6.8%yoy (consensus: 6.9%) in 4Q15 vs. 6.9% yoy in 3Q15 (qoq: 1.6% vs. 1.8%).Industrial production (IP) growth moderated to 5.9% yoy in Dec (consensus:6.0%) from 6.2% in Nov. While for the whole world at this moment, the top riskis a China hard landing, the data point to a gradual slowdown. Looking ahead,we expect GDP growth to slow further to 6.6% yoy in 1Q16 and we believepolicy will remain supportive, including possibly one RRR cut soon.

Deflation and divergence: China also released full-year 2015 GDP datatoday, which slowed to 6.9% yoy vs. 7.3% in 2014. However, nominal GDPgrowth is only 6.4% in 2015, implying a negative deflator of -0.5% (vs. +0.9%in 2014). Other than deflation, the economy has also shown largedivergences, with service and consumption outpacing industrial sector andinvestment. The service sector accelerated to 8.3% yoy in 2015 (2014: 7.8%),while the industrial sector decelerated to 6.0% (2014: 7.3%). As a result, theshare of services surpassed 50% of GDP for the first time. In terms of thecontribution from consumption to GDP growth, it rose to 4.6ppt in 2015 (2014:3.8ppt). Although people have talked about China’s rebalancing for years,when it actually starts, not many have the appetite to celebrate.

Headwinds still strong: First of all, property investment remainsdisappointing in Dec. Property investment dropped 1.9% yoy in Dec (Nov: -5.1%), the 5th consecutive month of contraction. Second, the industrial sectorsees very little signs of recovery. In Dec, power generation still declined by3.7% yoy. The recent fall in commodity prices could only make the wholeenergy sector even worse. Third, we estimate that financial sector could havecontributed 0.8ppt to GDP growth in 4Q15. Given a higher base and therecent market downturn, such contribution could drop to 0.4ppt in 1Q16.

Property sales weakened in Dec: A worrisome trend lately is the slowdownin national home sales. Property sales slowed to 1.6% yoy in Dec from 8.6%in Nov. Given the high inventory at this moment, the government might haveto roll out more easing measures to boost home sales. On the other hand, theland market is picking up. The fall in new starts narrowed to -6.7% yoy in Decfrom -21% in Nov. It suggests that we might see some modest recovery inproperty investment in the coming months. Overall, we expect propertyinvestment growth to improve moderately to 4.0% in 2016 from 1.0% in 2015.

Infrastructure investment as growth buffer: Overall FAI slowed to 8.2%yoy in Dec from 10.2% in Nov. By breakdown, property / manufacturing /infrastructure FAI growth was -2% / 5% / 12%, respectively. In 2015, propertyinvestment slumped due to high inventory. Manufacturing investment alsomoderated to 8% (2014: 14%) due to weak exports and over-capacity. Incontrast, infrastructure investment held up relatively well at 17% (2014: 20%).For 2016, we reckon the government has strong incentive to maintain a GDPgrowth between 6.5% and 7.0%. As such, the government has to rely oninfrastructure investment as the key growth buffer in 2016.