The most important parameter of the economic outlook this year would be the Communist Party Plenum. Due late October, it seems to be the last major chance for President Xi Jinping to consolidate his power. Moreover, the future government, which will take the power in 2022 and rule China for the following ten years, will largely be decided in this Plenum. Given such an important event, we believe the government will do its’ best to keep the growth on track and avoid any major policy shifts, which could possibly derail the economy. In this context, we see a marginal overshooting of growth, due to macro-stimulus, as a probability and expect a growth rate between 6,4-6,7%, if the goverment adopts the neighborhood of 6,5%, which has been recommended recently by government think-tanks.
Under these circumstances we expect the fiscal policy to be expansionary, mainly via infrastructure investments. Indeed, the Ministry of Finance has announced that fiscal policy would be managed ‘proactively’, with emphasis on infrastructure spending and tax breaks, which is also positive for stimulating domestic demand. Meanwhile, we believe that SOE reform and local government deleveraging would continue, albeit very carefully not to cause any disruption in wider economy.
We join the growing number of analysts and the People’s Bank of China (PBOC) itself, about monetary policy is closer to tightening than easing. However, we think that the PBOC would try to wait until the growth target is safe, before considering hikes in interest rates and/or reserve requirement ratio. Therefore, we expect first tightening steps to be taken after late third quarter, if inflation rate dangerously rises above 3%. Until then, the PBOC is likely to manage the monetary policy, using open market liquidity tools.
Meanwhile, the PBOC will also have to deal with currency depreciation and capital outflows, at least until mid-year, when Donald Trump’s actual policies would likely start to shape. For the whole year, we expect CNY to lose some ground against the dollar, but not considerably more than dollars’ rise against other currencies.
We believe that the positive surprise in 2017 would come from private sector investment. The recent rise in commodity prices helped producer prices and industrial profits to start increasing, the former after a 4,5 year slump. Therefore, we expect some relief in corporate balance sheets and continuation of recent pick-up in non-state fixed investment (see figure), which might carry total fixed asset investment and thus, growth up.
Before assessing risks, we finally look at foreign trade. The ~8% depreciation of yuan in real effective terms would arguably support exports, which is already recovering gradually. However, we believe that a similar pick up in imports would dampen the effect of net exports on growth, which does not regularly record positive contribuiton in recent years anyway. Of course, any prediction regarding foreign trade could easily become worthless, depending on the actions of a blonde man across the Pacific.
International analysts are consistently pointing to risks in China and predicting crises for the past several years (high debt levels, real estate bubbles, stock market crash, capital outflows etc). Alas (!), none of them had materialised yet. We do not argue that China does not face any risks and we plan to write about them in the future . However, the government’s capacity to deal with them, which is somehow being consistently neglected, will likely to be disposed to fend off the risks, especially in the year of the Plenum. Here, we proudly cite Mr. Stephen Roach, who also thinks risks about China are overblown. On the other hand, we exclude risks related to Mr. Trump here, since they would likely require more effort from China, than internal risks would.
The bottomline is, we basically expect Chinese growth to move sideways in 2017, with macro policies generally managed with emphasis on stability.