HSBC analysis of China's 2016 economic performance shows stabilised growth and eased deflation in producer prices. Can this continue in an uncertain 2017?
Source: Copyright Thomas Depenbusch This work is licensed under a Creative Commons Attribution 4.0 International License. https://creativecommons.org/licenses/by/4.0/
Qu Hongbin, chief economist for Greater China at HSBC
, identifies five key areas that will determine the nation's fortunes in the coming 12 months, with reflation being "the overarching theme".
"Strong infrastructure investment, a housing-market rebound, cuts to industrial over-capacity and rising global commodity prices helped turn a six per cent annual fall in domestic producer prices in 2015 into an increase in 2016. Raw materials such as iron ore, oil, coal and copper rose fastest," says Mr Qu.
"Easing deflation helps profit margins recover and reduces the real burden of debt. This especially helps state-owned enterprises, whose borrowings account for half of China’s total debt.
China's expansionary fiscal policy to continue
"We expect the expansionary fiscal policy to continue into 2017, with infrastructure investment remaining key while stable demand and easing deflation encourage private-sector investment. Yet consumer-price inflation should remain below three per cent for 2017, with GDP growing at 6.5 per cent and no need to change interest rates."
The analysis says that, while private investment accounts for more than two-thirds of all Chinese investment, the report points out that such investment fell below 10 per cent in 2016.
"That could have shaved 0.3 percentage points off nominal GDP growth. It also adversely affected productivity expansion. However, improving profits, prices and corporate confidence may avert further falls in private-sector investment. Lower taxes and social-security contributions would also help."
Are Trump's threats of Chinese import tariff a "bargaining chip"?
On trade, Mr Qu says that Donald Trump's threat during the US election campaign to impose a 45 per cent tariff on Chinese imports was more likely to turn out to be a "bargaining chip" rather than a reality.
"Both the Chinese and US economies have changed substantially since China joined the World Trade Organisation
in 2001, so a new framework of understanding based on mutual needs is necessary. Backward-looking, punitive policies are unlikely to benefit either side.
"A bigger area of negotiation lies with investment. The US wants a level playing field for its firms in China’s growing services sector, while increasingly globally-minded Chinese firms want to move up the learning curve. These goals require complex entry-requirement and regulatory standards. A major imminent breakthrough may be unlikely, but there is too much at stake for starting a trade war."
New home prices rise in Beijing and Shanghai
On property, the report points out that prices for new homes rose almost 30 per cent in Beijing and Shanghai in 2016. But since early October, more than 20 cities have limited sales to non-residents and increased down-payments.
"There are already signs of sales and prices starting to soften. However, we expect the growth impact of the slowdown to be less than in past cycles. First, the rally was limited to a few cities; second, this time it did not coincide with increasing economic growth or inflation that prompted monetary tightening."
Finally, on infrastructure investment, the analysis says that projects financed by China’s policy banks will offset the impact on growth of a softer property market. "The wide array of financing options available means such investment should remain resilient," says the analysis.Access hundreds of global services and suppliers in our Online Directory Get access to our free Global Mobility Toolkit