China in 2018: A commander of the world?

CHINA and Hong Kong markets started the new year with a bullish tone by posting a record winning streak.

The Chinese market ended year 2017 on a strong note despite signs of a slowing economy and tighter regulations.

The Hong Kong benchmark index was a standout performer – posting its most stellar performance since its inception in 1969 by rising 15 sessions continuously.

Improved global economic conditions and money inflows from mainland China had helped to push the index’s annual gains to 36 per cent, its best annual performance since 2009.

This seemingly unstoppable growth in the market shows no indication of slowing down, and leaving many wondering whether there will be a ceiling.

On a closer scrutiny, a few obstacles might emerge.

Growing debt, financial deleveraging, tightened policies in the domestic property market and government crackdown on pollution are the biggest threats to China’s economy this year.

The Chinese government is having a hard time balancing economic growth and debt reduction.

China’s debt to GDP ratio reached 260 per cent in 2017 and is expected to hit 327 per cent in four years’ time.

Disturbingly, two-thirds of the debt are being held by unprofitable and unproductive stateowned enterprises.

It is suffice to say that financial risk created by ballooning debt remains the biggest threat to the world’s second largest economy.

“Houses are built to be lived in, not for speculation,” emphasised President Xi during the 19th Party Congress.

That statement hinted to the market that sales growth and credit supply in the property sector might slow down as the government restricts access to mortgage and encouraged home renting.

On that note, tighter monetary conditions will especially disadvantage highly-leveraged small developers who have to compete in hostile land bids.

On its journey to ‘ quality’ growth, will China’s government be able to return its people clear blue skies by tolerating slower economic expansion? The answer is uncertain, but in the short term – yes.

Under the banner of its environmental campaign, Chinese authorities have shut down tens of thousands of factories to curb pollution.

As a by-product, production disruption and the supply shock may cut the country’s economic growth by 0.25 percentage points in the first quarter of 2018, according to Societe Generale SA.

Considering the factors mentioned above, we expect China’s economic growth in 2018 to soften to 6.5 per cent.

Aside from all that, US trade policies, tax reforms and geopolitical tension persist as external downside risks to the Chinese economy.