Find­ing a strong an­chor for the econ­omy

China Daily (Hong Kong) - - VIEWS -

With the sup­port from ex­pan­sion­ary fis­cal pol­icy and ac­com­moda­tive mon­e­tary pol­icy, we (at Stan­dard Char­tered) ex­pect China’s growth mo­men­tum to pick up mildly in the fourth quar­ter, lead­ing to a 6.8 per­cent year-on-year growth for the whole of 2016.

For 2017, we ex­pect the govern­ment to pri­or­i­tize growth sta­bil­ity. With Don­ald Trump be­com­ing United States pres­i­dent, the United King­dom start­ing the Brexit process, and ma­jor Euro­pean coun­tries go­ing to the polls, 2017 will be a year of in­tense ex­ter­nal un­cer­tainty for China. Do­mes­ti­cally, China’s econ­omy con­tin­ues to face head­winds and ris­ing fi­nan­cial risks. So, we ex­pect the govern­ment to give high pri­or­ity to po­lit­i­cal, eco­nomic and so­cial sta­bil­ity, and main­tain its growth tar­get of 6.5-7.0 per­cent for 2017.

On the bright side, the ser­vice sec­tor — which ac­counts for more than 50 per­cent of the econ­omy — has been grow­ing con­sis­tently at 7-8 per­cent over the past year, con­tribut­ing about 3.5 per­cent­age points to GDP growth. In ad­di­tion, pri­vate-sec­tor in­vest­ment ap­pears to be re­cov­er­ing after Pro­ducer Price In­dex turned from de­fla­tion to in­fla­tion in Septem­ber. Re­cent Pur­chas­ing Man­agers’ In­dexes have risen, too.

How­ever, we see the fol­low­ing down­side risks to the econ­omy in early 2017: Over­ca­pac­ity re­duc­tion in the steel and coal in­dus­tries is likely to con­tinue, weigh­ing on in­vest­ment in the min­ing and man­u­fac­tur­ing sec­tors. Re­cent pol­icy mea­sures to cool the prop­erty mar­ket have al­ready re­sulted in slower hous­ing sales, which may af­fect hous­in­gre­lated re­tail sales and dampen de­vel­op­ers’ in­vest­ment ap­petite. Fis­cal sup­port has been front­loaded in 2016, with spend­ing grow­ing twice as fast as rev­enue in the first three quar­ters. But spend­ing fell 12 per­cent year-onyear in Oc­to­ber, in­di­cat­ing less room for ex­pan­sion in the fourth quar­ter, which could slow govern­ment-re­lated ac­tiv­ity in the first quar­ter of 2017.

Trump’s poli­cies are likely to cre­ate head­winds for China’s ex­ports, and US-China re­la­tions are likely to ex­pe­ri­ence a bumpy start to his pres­i­dency. Dur­ing his pres­i­den­tial cam­paign, Trump threat­ened to la­bel China a cur­rency ma­nip­u­la­tor on his first day in of­fice and im­pose up to 45 per­cent im­port tar­iffs on Chi­nese prod­ucts. While it would be tech­ni­cally dif­fi­cult for the US Trea­sury to call China a ma­nip­u­la­tor with­out first re­vis­ing the cri­te­ria it adopted ear­lier this year, the US pres­i­dent has con­sid­er­able power over trade pol­icy — the US Trade Act al­lows the pres­i­dent to im­pose trade re­stric­tions with­out Con­gres­sional ap­proval. Given the in­ter­de­pen­dence of the two economies, how­ever, an all-out trade war would inflict dam­age on both coun­tries and is likely to be avoided.

There­fore, we ex­pect cur­rent ac­count sur­plus to nar­row to 2.6 per­cent of GDP for 2017 and 2.5 per­cent for 2018, re­flect­ing the less be­nign ex­ter­nal en­vi­ron­ment. We there­fore fore­cast 2017 growth at 6.6 per­cent.

Pol­icy sup­port is needed to achieve the growth tar­get, and the ex­pan­sion­ary fis­cal pol­icy is likely to con­tinue in 2017. Tighter con­trol of lo­cal gov­ern­ments’ ex­tra­bud­getary ac­tiv­ity has al­lowed the govern­ment to in­crease bud­getary spend­ing. And the Min­istry of Fi­nance has in­di­cated the govern­ment debt-to-GDP ra­tio was be­low 40 per­cent at the end of 2015, leav­ing am­ple room for more proac­tive pol­icy. We ex­pect the of­fi­cial bud­get deficit to in­crease to about 3.5 per­cent (4.0 per­cent based on our def­i­ni­tion) of GDP in 2017.

Mon­e­tary pol­icy may grad­u­ally shift from an eas­ing bias to a neu- tral po­si­tion due to ris­ing in­fla­tion, the yuan’s de­pre­ci­a­tion pressure and the in­com­plete task of delever­ag­ing. Av­er­age PPI is ex­pected to re­main in low sin­gle dig­its in 2017, and con­sumer price in­dex in­fla­tion may trend higher on re­silient prices for ser­vices and hous­ing rents, but we cut our CPI in­fla­tion fore­casts to re­flect sub­dued food in­fla­tion in the sec­ond half of 2016.

We ex­pect CPI in­fla­tion av­er­age to be 2.0 per­cent in 2016, and 2.1 per­cent in 2017. In ad­di­tion, pol­i­cy­mak­ers ap­pear to be in­creas­ingly con­cerned about as­set price bub­bles, one-way yuan de­pre­ci­a­tion ex­pec­ta­tions and ris­ing cor­po­rate lever­age. As a re­sult, we ex­pect no cuts in the bench­mark rate or re­serve re­quire­ment ra­tio in 2017. The Peo­ple’s Bank of China may rely on open-mar­ket oper­a­tions and lend­ing fa­cil­i­ties to main­tain suf­fi­cient liq­uid­ity, and the gap be­tween credit growth and GDP growth is likely to nar­row.

The au­thor is an econ­o­mist at Stan­dard Char­tered China.

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