Mo­men­tum gives hope in a chal­leng­ing year

De­spite un­cer­tain­ties, in­di­ca­tors are good for rea­son­able growth, giv­ing the na­tion's pol­i­cy­mak­ers some lee­way

China Daily European Weekly - - Comment - Louis Kuijs

While both global trade and China’s econ­omy en­ter 2017 with de­cent growth mo­men­tum, we ex­pect GDP growth to ease to 6.3 per­cent this year due to a harsher cli­mate for China’s ex­ports in the United States, slower real es­tate in­vest­ment and, im­por­tantly, a change in tone of pol­i­cy­mak­ers to­ward some­what less em­pha­sis on growth. Real GDP growth edged up to 6.8 per­cent year-on-year in the fourth quar­ter of 2016 as ser­vices out­put mo­men­tum picked up. This brought whole-year GDP growth to 6.7 per­cent, down from 6.9 per­cent in 2015 but com­fort­ably ex­ceed­ing the “bot­tom line” of the 6.5 to 7 per­cent target range.

How­ever, this was at the cost of a fur­ther rise in lever­age. Over­all credit — to­tal so­cial fi­nanc­ing ex­clud­ing eq­uity fi­nanc­ing, but in­clud­ing lo­cal gov­ern­ment bond is­suance — grew 16.1 per­cent in 2016.

Re­bal­anc­ing con­tin­ued last year. With the ser­vice sec­tor out­pac­ing in­dus­try and price changes also in fa­vor of ser­vices, its share in GDP climbed by 1.2 per­cent­age points to 51.9 per­cent.

In­vest­ment mo­men­tum picked up in the fourth quar­ter of 2016, hav­ing weak­ened mid-year, with growth of fixed as­set in­vest­ment ris­ing to 7.9 per­cent, sup­ported by some im­prove­ment in cor­po­rate in­vest­ment. Sur­pris­ingly, real es­tate fixed as­set in­vest­ment also ac­cel­er­ated again in the fourth quar­ter in spite of mea­sures taken in large cities to con­tain hous­ing price in­creases.

Con­sump­tion re­mained ro­bust in the fourth quar­ter, with real re­tail sales growth 9.1 per­cent, although pas­sen­ger car sales slowed in De­cem­ber.

The growth in ex­ports of real goods slowed to 1.4 per­cent year-on-year in the fourth quar­ter. But the three month mov­ing av­er­age, the sea­son­ally ad­justed monthly ex­port vol­ume, rose a full 4 per­cent in De­cem­ber, point­ing to solid ex­port mo­men­tum go­ing into 2017.

Con­sumer price in­fla­tion eased in De­cem­ber to 1.9 per­cent year-on-year on lower food price in­creases. While the pro­ducer price in­dex rose a full 5.5 per­cent year-on-year, we ex­pect the spurt to run out of steam in the first half of 2017 and fore­cast con­sumer price in­dex in­fla­tion to re­main com­fort­ably be­low the likely target of 3 per­cent in 2017, sug­gest­ing no ma­jor mon­e­tary pol­icy im­pli­ca­tions.

Look­ing ahead, re­cent global trade in­di­ca­tors show a de­cent mo­men­tum go­ing into 2017 and we ex­pect it to grow by 2.7 per­cent this year, from 1.4 per­cent in 2016. In­deed, China should in prin­ci­ple ben­e­fit from any pick-up in growth in the US from more ex­pan­sion­ary fis­cal pol­icy un­der the new Trump ad­min­is­tra­tion. But, while we do not ex­pect across-the board tar­iffs, it is clear to us that China’s ex­ports to the US will face a harsher cli­mate. Over­all, we ex­pect the ex­port out­look to im­prove some­what next year.

Do­mes­ti­cally, in­fras­truc­ture in­vest­ment should re­main solid. And cor­po­rate in­vest­ment should ben­e­fit from re­newed profit growth. But the tight­en­ing of hous­ing pur­chas­ing re­stric­tions in many large cities will weigh on real es­tate in­vest­ment. We ex­pect con­sump­tion growth to ease fur­ther on mod­er­at­ing wage growth, but to re­main rel­a­tively solid.

Mean­while, the mes­sages from the Cen­tral Eco­nomic Work Con­fer­ence and other re­cent state­ments sug­gest pol­i­cy­mak­ers are mov­ing to put some­what more em­pha­sis on re­duc­ing fi­nan­cial risks and less on en­sur­ing at least 6.5 per­cent GDP growth. The Cen­tral Eco­nomic Work Con­fer­ence pro­vided a man­date for fur­ther fis­cal ex­pan­sion but called for a less gen­er­ous mon­e­tary stance. We do not ex­pect a bench­mark in­ter­est rate rise this year but ex­pect pol­i­cy­mak­ers to guide over­all credit growth down to around 14 per­cent in 2017.

Over­all, we ex­pect GDP growth to slow to 6.3 per­cent this year. High un­cer­tainty means Chi­nese eco­nomic pol­i­cy­mak­ers will want to keep their op­tions open. But at least the rea­son­able cur­rent growth mo­men­tum gives pol­icy some two-way lee­way.

Look­ing ahead, re­cent global trade in­di­ca­tors show a de­cent mo­men­tum go­ing into 2017 and we ex­pect it to grow by 2.7 per­cent this year, from 1.4 per­cent in 2016.

The au­thor is the Hong Kong-based head of Asia eco­nom­ics for Ox­ford Eco­nom­ics. The views do not nec­es­sar­ily re­flect those of China Daily.

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