Taking the lead
China’s success critical to global growth
Being the biggest contributor to global growth, China maintaining moderate economic growth has never been more critical to the global economy.
The year ahead will be politically and economically challenging, as governments and international agencies respond to a dynamic and rapidly changing environment.
Politics is not my strong suit, so I do not intend to stray into the pure political issues dominating the world pages of New Zealand media.
But it is important to state that the prospect of tit-for-tat trade or currency wars represents a grave threat to all countries navigating safe passage through the uncertainties of 2017.
It’s also fair to note that my colleagues in New Zealand’s banking and finance sector are incredulous that the world has now reached a point where it is President Xi Jinping who is extolling the virtues of free trade and globalisation, while President Donald Trump is threatening to implement trade barriers and isolationist policies. Strange days indeed. President Xi’s speech on global trade to leaders at the World Economic Forum at Davos, Switzerland, is well worth a read.
He highlights the lack of robust drivers for growth and that is evident when one looks at the previous 12 months: expected global gross domestic product (GDP) of only 2.5 per cent, an expansion of world trade by a mere 1.8 per cent and a 12.5 per cent drop in international direct investment, a five-year low.
If political, social and economic conditions are to improve this year, then the world’s leaders must act together to address the great challenges of our times.
The course that China charts internationally will be critical to achieving these aims. It is not just its demand for the world’s commodities or the increasing purchasing power of its middle class, but China’s role as a growth-focused investor that makes it important.
Outbound non-financial investment in the 11 months to November amounted to 1.07 trillion yuan ($161.7 billion), up 55.3 per cent on a year-by-year basis.
With many market commentators highlighting emerging economies’ net outflow of investment in 2016 and uncertainty around the 2017 environment (particularly with the Fed raising rates and ongoing trade friction), China’s investment abroad is indispensable to global growth.
So, much depends on the performance of China’s economy if it is to continue to support the global economy in 2017 as it has in recent years.
We expect the Government to continue its reform programme, particularly around the supply side, as it further transitions the economy from old growth engines to new ones. Macro policy will be firmly focused on stabilising growth (GDP is forecast at around 6.7 per cent; inflation at 2.5 per cent) by suppressing bubbles, particularly around housing, and eliminating of excess capacity. Structural economic changes engineered last year will continue to deliver growth dividends in 2017, particularly in the consumer and services sector, while priority will be given to the accelerated growth in the high-tech and new energy vehicles industries. The corollary of this policy will be the continued slowdown of traditional sectors, such as mining. If there was one event from last year to instil confidence in China’s economy, it would have to be the ending of a 54-month negative growth in the Producer Price Index, which measures changes in the price of goods sold by manufacturers. This is a direct reflection of supplyside reform and reduced excess capacity, an increase in the demand for raw materials and the reduction in deflationary pressures as a result of a stabilised economy. The outlook is positive, which is not to downplay the significant risks that China (and the world, including New Zealand) faces, particularly the uncertainties in the political economy. President Trump is not the only risk factor for businesses but he will certainly be the primary focus of the business media this year, and rightly so. Nonetheless, I am personally confident in the fundamentals of China’s economy and, for the sake of the global economy, it is an optimism worth sharing.
If political, social and economic conditions are to improve this year, then the world’s leaders must act together to address the great challenges of our times.