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China Economy

China’s growth stabilises, but dangers loom, say economists

Lack of clarity about President Donald Trump’s economic policies adding to the uncertainties facing the mainland economy, according to observers

PUBLISHED : Monday, 20 February, 2017, 12:26pm
UPDATED : Monday, 20 February, 2017, 10:57pm

China’s economic growth looks stronger so far this year, but the country still faces financial risks and uncertainties created by the lack of clarity over the policies to be pursued by Donald Trump’s administration in Washington, Chinese economists said.

The world’s second-largest economy is likely to grow by seven per cent in the first quarter due to a recovery in manufacturing and exports, said Liang Hong, chief economist at China International Capital Corporation, a leading brokerage firm in the mainland. That compares with growth of 6.8 per cent posted in the final quarter of last year.

Without black swan events such as “a cliff fall in external demand” or a rapid rise in real interest rates in China, the nation’s economic recovery will continue, Liang told a forum held by the National School of Development at Peking University on Sunday.

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However, the risk of capital flowing out of the country will persist as the US Federal Reserve is likely to continue to raise interest rates, said Guan Tao, a former senior official at the State Administration of Foreign Exchange.

This is forcing China’s central bank to walk a fine line between monetary easing and tightening.

The People’s Bank of China has refrained from lowering the amount banks must hold in reserves or cutting interest rates for almost a year for fear of fuelling asset bubbles and weakening the strength of the country’s currency.

The People’s Bank of China said in a quarterly monetary policy report published on Friday that it would focus more on managing financial risks as the downward pressure on economic growth “has lessened”.

However, the central bank will still need to cut banks’ reserve ratios to release cash into the economy, according to George Wu, a former monetary policy official at the central bank and now chief economist at Huarong Securities.

“The technique and timing [for the central bank] to adjust is very important,” he said, pointing out that China’s deposit reserve ratio remains one of the highest among the major economies.

“Within all levels inside the government, there is a lack of lack consensus on many issues: whether financial risk is the biggest risk, whether supervision is problematic, whether these are the responsibilities of the central bank and financial regulators,” said Wu.

Part of the reason was that there are many uncertainties beyond Beijing’s control, one economist said.

Zhu Min, former deputy director of the International Monetary Fund, said economic and financial movements in the US were the biggest uncertainty globally given the lack of details about President Trump’s economic policies.

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But Trump’s pledge to cut taxes, if pursued, would add fuel to Chinese enterprises investing in the US, said Zhu, who is the director of the National Institute of Financial Research at Tsinghua University in Beijing.

He said political factors would affect US economic policy decisions and rising protectionism and the backlash against globalisation around the world risks creating further political instability.

“We will see greater volatility in financial markets this year,” he said.