China’s 2018 eco­nomic out­look pos­i­tive

China Daily European Weekly - - Comment - The au­thor is head of Asia Eco­nom­ics, Ox­ford Eco­nom­ics. The views do not nec­es­sar­ily re­flect those of China Daily.

Vow to strengthen so­cial­ism with Chi­nese char­ac­ter­is­tics means a greater role for State-owned en­ter­prises in econ­omy and their ad­her­ence to the CPC lead­er­ship

than sud­denly, slow down credit growth in the coming years.

Re­flect­ing the grad­ual tight­en­ing of mon­e­tary and fi­nan­cial pol­icy, China’s do­mes­tic de­mand is ex­pected to cool down next year, es­pe­cially in real es­tate and in­fra­struc­ture in­vest­ment. With con­sump­tion mo­men­tum re­main­ing solid, and out­pac­ing in­vest­ment, real GDP growth should ease from 6.8 per­cent this year to 6.4 per­cent next year.

While the con­sumer price in­dex is ex­pected to rise in 2018, it should re­main be­low the Peo­ple’s Bank of China’s likely 3 per­cent tar­get, and thus may not have ma­jor pol­icy im­pli­ca­tions. And the sharp rise in out­put prices in the heavy in­dus­try — boosted by re­cent pro­duc­tion cuts to re­duce pol­lu­tion — is likely to mod­er­ate sig­nif­i­cantly in 2018. But, af­ter hav­ing re­mained very lim­ited, we ex­pect spillover into out­put prices in other parts of the econ­omy to in­crease some­what, adding to in­fla­tion.

As­sum­ing the US dol­lar re­mains broadly un­changed against other ma­jor cur­ren­cies next year, the yuan should hold its own against the green­back. But China is not likely to swiftly re­lax its pol­icy on out­flows be­cause net fi­nan­cial out­flows re­main siz­able. And if the for­eign ex­change mar­ket faces re­newed pres­sure, pol­i­cy­mak­ers are likely to more force­fully clamp down on out­flows in­stead of al­low­ing sig­nif­i­cant cur­rency de­pre­ci­a­tion.

Other key risks are faster slow­down in the real es­tate sec­tor and trade fric­tion with the United States. The Don­ald Trump-led US ad­min­is­tra­tion re­mains un­happy with US-China trade re­la­tions and is ex­plor­ing ways to take pol­icy ac­tions that it be­lieves will force change, in­clud­ing cre­at­ing more bar­ri­ers against Chi­nese ex­ports.

While ad­dress­ing the re­cent 19th Na­tional Congress of the Com­mu­nist Party of China, Gen­eral Sec­re­tary Xi Jin­ping called for “more em­pha­sis on qual­ity and equal­ity as op­posed to quan­tity” in the decades ahead. The qual­ity and equal­ity as­pects will in­flu­ence China’s eco­nomic pol­icy in the next 10 years. One area of fo­cus is on in­no­va­tion, “Made in China 2025” and mov­ing up the value chain.

Pol­i­cy­mak­ers are also ex­pected to make greater ef­forts to fur­ther in­crease peo­ple’s ac­cess to health­care, ed­u­ca­tion and pen­sions, as well as to bet­ter pro­tect the en­vi­ron­ment and ecol­ogy.

Xi also said China will fur­ther open up its econ­omy and mar­kets. The re­cent move to re­move for­eign own­er­ship lim­its on banks and rais­ing those on other fi­nan­cial in­sti­tu­tions to 51 per­cent un­der­scores this com­mit­ment. That Xi also vowed to strengthen so­cial­ism with Chi­nese char­ac­ter­is­tics in the coun­try means a greater role for State-owned en­ter­prises in the econ­omy and their ad­her­ence to the CPC lead­er­ship.

China’s pur­suit of an eco­nomic model with a tight link be­tween the State and busi­nesses could com­pli­cate its fur­ther in­te­gra­tion with the global econ­omy in the coming decades, as the rules that gov­ern the cur­rent in­ter­na­tional trad­ing and in­vest­ment sys­tem are based on a sep­a­ra­tion be­tween states and the cor­po­rate sec­tor.

China’s lead­er­ship also seems com­mit­ted to con­tin­u­ing “sup­ply side struc­tural re­form”, in­clud­ing cut­ting ca­pac­ity and pro­duc­tion in heavy in­dus­try, partly in or­der to re­duce pol­lu­tion. While this will weigh on growth of in­dus­trial out­put and cor­po­rate in­vest­ment, it should con­tinue to sup­port profit mar­gins.

The sup­ply-side struc­tural re­form over­laps with the SOE re­form, with ef­forts to im­prove prof­itabil­ity and close down “zom­bie en­ter­prises” lead­ing to ca­pac­ity con­sol­i­da­tion, clo­sure and merg­ers and ac­qui­si­tions among SOEs. But the SOE re­form will re­main guided by ob­jec­tives such as en­sur­ing that the SOEs re­main pil­lars of the econ­omy.

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