China Economy
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Chinese 2017 growth in question with the arrival of Trump, the property market cooling and currency still unsettled

Analysts warn external uncertainties and domestic structural problems weigh on 2017 outlook

PUBLISHED : Wednesday, 25 January, 2017, 1:20pm
UPDATED : Wednesday, 25 January, 2017, 11:01pm

China’s continued policy of prioritising short-term growth targets has worsened its structural problems, according to analysts, while growth in 2017 is facing the double challenge of second-guessing what Donald Trump might do, coupled with a cooling property market at home, according to analysts.

On Monday Fitch Ratings issued a note which examines how the country has just reported stronger-than-expected economic growth for the last quarter in 2016, up by 6.8 per cent year on year.

While the ratings agency says the figures prove the authorities’ stimulus measures had been “effective in maintaining its growth target”, it also warns of more “significant risk to medium-term macroeconomic stability”.

“The authorities’ direct fiscal expansion and quasi-fiscal stimulus channelled through state-owned enterprises (SOE) were vital to stabilising growth in 2016,” said Fitch.

It notes SOE fixed-asset investment growth surged to 19.1 per cent in 2016, up from 10.7 per cent the previous year. Outside of the SOE sector, fixed-asset investment growth slowed markedly, underlining the importance of stimulus in propping up demand.

“That also highlights,” it added, “that the economy might lack self-sustaining growth momentum”.

Larry Hu, an analyst with Macquarie, says the Chinese economy has gone through a “stop-go pattern” since 2012, by shifting between stimulus-driven growing mini cycles, and policy tightening to mitigate risk.

“It helps generate a less-bumpy deceleration, but also leads to fast debt accumulation and falling investment returns. Such a strategy cannot last forever,” he added, while anticipating slower growth in 2017, mainly dragged down by property and automobile sales.

Macquarie bases China’s better-than-expected growth in 2016 on 22 per cent growth in property sales and 16 per cent auto sales growth, which he and fellow Macquarie analyst Jerry Peng agree are both unsustainable.

The authorities’ direct fiscal expansion and quasi-fiscal stimulus channelled through state-owned enterprises were vital to stabilising growth in 2016
Fitch analysts’ report

They now expect a 10 per cent drop in gross floor area in property sales, and 5 per cent growth in auto sales in 2017, and annual GDP growth to slow to 6.5 per cent from 6.7 per cent in 2016, as more headwinds hit the economy in the second quarter, especially from the property sector.

But the biggest risk over the next couple of years, they add, will come from how the US and Chinese governments recalibrate their relationship, in most-notable areas such as trade, currency, and geopolitics.

Andrew Batson, an analyst with Gavekal Dragonomics, thinks China’s underlying business cycle peaked in the second quarter of last year, and has been decelerating gradually ever since as the authorities refrained from additional stimulus.

“Those figures will inevitably look worse in early 2017, if only in comparison to the huge boom in early 2016,” he wrote in a research report published on Monday.

“The cooling is most visible in property sales growth, which slowed to 12 per cent in December, from 34 per cent in September and 44 per cent in April,” he wrote.

Batson argues growth could certainly take a further hit if the US under Trump makes any radical changes to its tax and trade policies.

Although he thinks China has plenty of weapons to fight a trade war, “those measures would be unlikely to completely offset a sudden shock to its exports”.

Analysts with Nomura suggest China’s latest December economic data was all weaker than expected, pointing to what it calls a “soft” end to the year as both industrial production and fixed asset investment growth moderated, while real retail sale growth remained flat.

Headwinds from structural domestic factors, such as high leverage, unfavourable demographics, and global risks such as US trade policy uncertainties remain, and we expect full-year growth to slow to 6.5 per cent in 2017 from last year’s 6.7 per cent
Nomura analysts’ report

“Headwinds from structural domestic factors, such as high leverage, unfavourable demographics, and global risks such as US trade policy uncertainties remain, and we expect full-year growth to slow to 6.5 per cent in 2017 from last year’s 6.7 per cent,” they wrote in a report last week.

Analysts with UBS, meanwhile, edge growth down a notch to 6.4 per cent in 2017, citing a modest downward property adjustment largely offset by government-led infrastructure investment and a small improvement in external demand.

“The government set ‘stability’ as the main theme with more proactive fiscal policy and neutral monetary policy for 2017 at its Economic Work Conference, and highlighted risk controls in its macro policy settings,” UBS wrote in its report last week.

“This means that credit growth will remain supportive of growth, softening only modestly in 2017.”

In the meantime, they say monetary conditions will unlikely be eased visibly after recent tightening, especially in the first half of 2017, due to heightened capital outflows and inflationary expectations.

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