China economy

A good start but what’s in store for China’s economy in 2018?

Early indicators point to strong growth but will it give Beijing the strength to take on debt?

PUBLISHED : Friday, 05 January, 2018, 6:03pm
UPDATED : Friday, 05 January, 2018, 10:28pm

China got off to a promising start to the year, with the yuan strengthening to a 20-month high against the US dollar and Shanghai stocks gaining nearly 3 per cent in the first week of 2018.

The first indicators of the year, the purchasing managers indices, also pointed to faster growth in economic activity. A slew of other results over the next few days are expected to reflect strong growth.

Optimism about the year ahead, albeit cautious, is gaining ground but there are persistent worries about China’s debt mountain and the threat of trade disputes with the United States and Europe.

Gavekal head of research Arthur Kroeber said talk of China risking a “Japan-style lost decade” of economic stagnation was banished after Beijing engineered a property and infrastructure stimulus last year.

“This credit-fuelled surge raised predictable worries that China was flirting with financial meltdown. But impressively, Beijing spent most of 2017 cracking down on financial risk, sharply cutting the growth in shadow lending – with zero impact on economic growth,” Kroeber wrote in an article published on Friday.

Kroeber said it was his bet that China could easily maintain growth while containing financial risk for at least one more year.

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He is not alone. JP Morgan this week raised its China GDP forecast for 2018 to 6.7 per cent, citing a strong recovery in developed economies after the latest tax overhaul in the US and monetary easing in the European Union.

“The upward growth revision for 2018 mainly reflects the positive external demand outlook,” JP Morgan chief China economist Zhu Haibin wrote in a note. “The global economy is expected to carry on with sustained, above-potential growth [to help Chinese exports].”

The 6.7 per cent forecast is close to Beijing’s own prediction. The Chinese Academy of Social Sciences forecast that China’s economy would expand about 6.7 per cent in 2018 from an estimated 6.8 per cent in 2017.

That will be good enough for Chinese leaders. Beijing is expected to set a growth target of 6.5 per cent for 2018, unchanged from 2017, Reuters reported on Thursday.

Macquarie Group chief China economist Larry Hu said that with Xi playing down the importance of growth to focus on safety, the environment and equality, it would be interesting to see how far Beijing would push deleveraging and tolerate a slowdown.

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“Beijing has tried to rein in local government debt several times over the past few years. But every time growth started faltering, the administration backed down. Now in the new political cycle, will they be braver?” Hu wrote in a note.

The central government has been locked in a debt-driven growth model since the global financial crisis a decade ago, implementing an accommodative monetary policy to spur infrastructure spending and property development.

With Xi cementing his hold on power at the Communist Party’s national congress late last year, the president now had more room to push ahead with deleveraging, a central element of his supply-side structural reforms, analysts said.

Standard Chartered Bank chief China economist Ding Shuang said he sensed “a tilt in the balance towards faster reforms and increased risk-taking in 2018”, the 40th anniversary of China’s reform and opening up. Four decades ago, then paramount leader Deng Xiaoping began to dismantle the command economy to pave the way for state capitalism, a shift that transformed China from an economic backwater into the world’s second-biggest economy.

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At the same time, Xi is unlikely to put a sudden brake on debt. Ding said China’s overall debt-to-GDP ratio was likely to rise to 277 per cent at the end of this year from estimated 270 per cent at the end of 2017.

Louis Kuijs, head of Asia Economics from consultancy Oxford Economics, said there were no signs of changes on a similar scale on the horizon.

“In spite of the change in economic policy focus in the coming decades ... we do not see signs of a material change in the macro policy stance in the coming years, forecasting a gradual slowdown in growth of GDP and credit,” Kuijs said.