BEIJING -- Excess manufacturing capacity, rising real estate inventories and volatile financial markets weigh on China's economy as the government tries to engineer a soft landing, with data for 2015 suggesting that deflation may loom.
China's real gross domestic product growth slipped to 6.9% last year, the lowest in a quarter century. Real growth had not dropped below 7% since 1990, when international sanctions were imposed in response to the 1989 Tiananmen Square crackdown.
Nominal growth, based on official GDP figures, totaled 6.4%, falling below real growth for the first time since 2009. Nominal growth that is slower than real growth indicates heavy deflationary pressure.
Severe overcapacity in major manufacturing industries is one cause. China's steel industry has 400 million tons of excess capacity. Exports came to 100 million tons in 2015, on par with Japan's annual output. With supply outstripping demand, wholesale prices sank 5.2% in 2015, 3.3 percentage points faster than in 2014.
Companies are shouldering heavier real debt-repayment burdens despite repeated interest rate cuts by the People's Bank of China. Production is depressed, with crude steel, cement and sheet glass output dropping in 2015. Electricity use, a more accurate gauge of economic conditions, slid 0.2%.
Mounting real estate inventories are another drag on the economy. Inventories soared nearly 50% in two years to 718.53 million sq. meters at the end of 2015. Housing activity has been sluggish for some time in many outlying cities.
Office building vacancy rates have reached about 40% in the inland cities of Chongqing and Chengdu, a developer said. With little new investment coming in, spending on property development edged up 1% in 2015 -- just one-tenth the growth seen in 2014.
Turmoil in financial markets compounds the country's problem. The slide in Chinese stocks since the start of the year could dampen brisk consumer spending. Services accounted for half of GDP in 2015, with the finance industry contributing significantly amid a rise in stock trading. If retail investors flee the market, growth could drop accordingly.
Capital flight is accelerating, and the yuan faces heavy selling pressure. Sharp depreciation would eat into the earnings of real estate developers and other companies with debt denominated in foreign currencies. Though the central bank has stepped in repeatedly to prop up the yuan, these interventions have soaked up domestic money, making monetary easing less effective.
With consumer prices up 1.4% in 2015, China has not suffered the sustained price declines that define deflation. Market players have long doubted the accuracy and transparency of the official GDP figures, and some question whether the numbers have been fudged to put growth near the government's target of around 7%.
China's GDP has grown to more than double that of Japan and about 60% that of the U.S. at current exchange rates. But a tough road lies ahead. President Xi Jinping called Monday for tackling overcapacity, stressing the need to improve efficiency in the manufacturing sector -- the epicenter of the slowdown -- to maintain stable growth. China even relies on imports for high-quality ballpoint pen nibs, Premier Li Keqiang noted recently.