China Economy

China may drop stimulus measures as economy gathers steam, say analysts

PUBLISHED : Wednesday, 01 March, 2017, 4:47pm
UPDATED : Wednesday, 01 March, 2017, 11:23pm

China’s economy has showed a strong recovery at the start of this year, offering a good opportunity for the country’s lawmakers attending the annual parliamentary sessions in Beijing starting on Sunday to discuss whether it’s time to pull back investment stimulus and focus on structural economic changes.

The official Purchasing Managers’ Index measuring activity in the manufacturing sector beat market expectations by rising to a three-month high of 51.6 in February and has already stayed in the expansionary territory for seven consecutive months.

The Caixin manufacturing PMI, which weighs more on small and medium-sized firms, has also kept rising for six straight months and jumped to a four-year high of 51.7 last month. The 50-point mark separates growth from contraction.

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The strong performances added fresh evidence that the much-feared “hard-landing” risk facing the world’s second biggest economy has dispersed, prompting a number of institutions from the International Monetary Fund to the brokerage China International Capital Corp to revise up their estimates for China’s growth in 2017, despite uncertainties created by threats of a trade war from US President Donald Trump.

“The Chinese economy has largely guaranteed a soft landing,” said Harrison Hu, chief Greater China economist of NatWest Markets in Singapore.

“Although the impact of headwinds, such as property restrictions, neutral monetary policy and less tax cuts in the auto sector, may show up in the second quarter, it still receives certain support in the medium-term cycle for the deep restructuring of manufacturing sector in the past several years,” he said.

The next step for decisionmakers, according to Harrison, should be considering how to end stimulus measures and pay more attention to reducing financial risks and levels of debt.

Local officials are planning trillions of yuan in new investment this year amid a major reshuffle within the central government ahead a Communist Party congress in the autumn in order to boost their economies and increase their chances of gaining promotion.

The central government seems cool headed about the recovery, which could lead to a shift away from eye-catching economic numbers towards the quality of economic growth.

The government has started with relatively tight monetary policy, including a money market rate rise and guidance on credit growth to tackle asset bubbles and reduce financial leverage.

At the meeting of the central financial and economic affairs leading group on Tuesday, President Xi Jinping said a system should be set up to coordinate financial regulations to safeguard against systemic risks and that the pace of economic reforms should be accelerated.

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Zhang Jie, an economist at China Investment Securities in Beijing, said China may still have concerns about economic growth in the second half of the year as it had highlighted the need for proactive and effective fiscal policy.

“China may continue to raise fiscal deficit ratios, probably to 3.5 per cent, at the upcoming National People’s Congress,” she said.

The recovery from the end of last year of economic demand overseas, which benefits China as the world’s largest exporter, also faces major uncertainties.

President Trump has not yet taken any meaningful actions against China despite his campaign rhetoric accusing Beijing of currency manipulation and his threats to impose 45 per cent tariff s on Chinese goods.

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However, when addressing the US Congress on Tuesday, President Trump said he “believes strongly in free trade but it also has to be fair trade”, refuelling expectations that he may impose protectionist measures.

“Stronger external demand appears to have played a key role in the pick-up [in China]. We don’t think [this] will be sustained,” Julian Evans-Pritchard, a China economist at the Capital Economics, wrote in a research note.