Split opinions

Experts offer divergent views about what early- 2017 economic figures portend for rest of year

The economic data released so far this year indicate that the economic turnaround that emerged in the second half of 2016 may have extended into 2017 – or at least that’s what some experts think. Others see the promising economic numbers as simply the result of yet another unsustainable increase in infrastructure spending. Economists have diverging opinions about the longevity of the turnaround because no one is sure what’s behind it, so it remains unclear whether it is the beginning of a trend or just a flash in the pan.

China’s economy appears to be off to a promising start in 2017.

The country’s manufacturing Purchasing Managers’ Index ( PMI) came in at 51.6 in February, up from 51.3 in January, according to figures the National Bureau of Statistics ( NBS) released on March 1. The February reading was the seventh straight month of expansion for the factory gauge. A reading above 50 indicates expansion.

Other data have also pointed to a burgeoning recovery. For example, industrial electricity consumption surged 6.9 percent year- on- year in the first two months this year, NBS spokesman Sheng Laiyun said during a press conference on Tuesday.

The data have left the public with a divergent view on the economy. Liang Hong, chief economist with China International Capital Corp, has raised her projection for China’s GDP growth in 2017 from 6.7 percent to 6.8 percent.

Other economists have adopted a more sober view about the economy’s prospects this year. Some have said the promising data released so far in 2017 are just inertial growth following China’s stabilizing economy in the second half of 2016, and it’s too early to tell whether the economy is in recovery.

For instance, a representative of a large investment com- pany said on condition of anonymity that the latest economic data are just a reflection of the domestic economy over the past six to 12 months and don’t represent the future.

Liu Shijin, deputy director at the China Development Research Foundation, an official think tank in Beijing, said that 2017 will be a year for “testing the economy’s bottom.”

“China’s economy is very close to, or has already hit, bottom. But the bottoming out process is complicated and needs multiple verifications,” Liu said.

China’s GDP grew 6.8 percent in the fourth quarter of 2016, up from 6.7 percent over the first three quarters of the year.

Uncertain sustainability

The divergent views about the direction of China’s economy stem from the fact that experts are not certain about what’s behind the recent wave of unexpectedly positive economic data, so they can’t determine if it is sustainable.

There are mainly two explanations for the economic turnaround in late 2016.

The first is that government measures to cut excess industrial capacity brought supply more in line with demand, boosting the economy.

In 2016, China shed more than 65 million tons of inefficient steel capacity and more than 290 million tons of excess coal- mining capacity, according to the central government.

In September 2016, China’s Producer Price Index ( PPI), which measures costs of goods at the factory gate, broke a 54- month streak of contractions to inch up 0.1 percent year- on- year. In February, the PPI shot up 7.8 percent year- on- year, according to NBS data released on March 9.

The jump in producer prices pushed up profit margins for industrial companies. Major industrial companies saw their profits grow 8.5 percent in 2016, compared with a 2.3 percent contraction in 2015, according to NBS data in January.

But experts have been reluctant to say that the jump in the PPI is the beginning of a trend.

Yu Yongding, an economist with the Chinese Academy of Social Sciences ( CASS), said it will take a few more months for a recognizable trend to emerge in the PPI, which can jump between positive and negative readings for months on end.

Niu Li, director of the Macroeconomic Research Office at the State Information Center, said the improvement in profits mostly took place in companies in upstream sectors, while downstream sectors remained weak, showing that China’s “transmission mechanism” is not smooth enough.

Some experts, like Xu Zhong, director of the People’s Bank of China’s research bureau, nevertheless thinks the recent acceleration in economic growth resulted from government stimulus policies for the real estate and infrastructure sectors.

His views were echoed by Jiang Chao, a senior analyst at Haitong Securities.

“It’s the same old formula of the economy being goosed by property and infrastructure investment,” Jiang said.

Infrastructure investment rose 17.4 percent in 2016, the NBS reported in January.

Some experts questioned whether infrastructure investment can continue to rise this year. Yu Bin, a senior macroeconomics researcher with the Development Research Center of the State Council, said that it has become difficult to find infrastructure projects with good returns. Moreover, declining local government revenue will prevent localities from spending a lot of money on infrastructure.

Liu Chenming, an analyst at TF Securities, pointed out that government policy discourages running higher deficit spending, which is necessary to increase infrastructure spending.

Still, there have been a few clear winners over the last few months, and one of them is the real estate sector.

The Guangdong- based real estate developer Country Garden saw its sales surge 273.7 percent year- on- year in January, according to a report by Pingan Securities in February.

Clamping down on risk

As the economy makes a turn for the better, concern has grown about how to deal with burgeoning risks, particularly in the financial sector.

The US- based investment bank Goldman Sachs estimated that there is a 25 percent chance that China will suffer a financial crisis in 2017 and a 50 percent chance in 2018 due to capital outflows and the country’s high debt levels.

The government implemented measures in the second half of 2016 to deal with financial risks, including strengthening management over financial leverage and crafting regulations for the huge capital management market.

During the Central Economic Work Conference held from December 14 to 16 in Beijing in 2016, the government promised to curtail financial risks and cut leverage in 2017.

However, Yu from the CASS warned that deleveraging should take place gradually.

“The first step should be to slow the growth in leverage, and then begin diminishing leverage,” Yu noted. “The process should be controlled.”