China is still the most important economy to watch for most shipowners. Chief correspondent Jason Jiang assesses prospects in the People’s Republic for 2017.
2016 was a turbulent year for China. For the year ahead, China’s Central Economic Work Conference has made “seeking progress while maintaining stability” the main theme for economic work, pledging to push for substantial progress in supply-side structural reform.
The forecasting department at the State Information Center (SIC) predicts that China’s economic growth could slow to 6.5% this year from about 6.7 percent in 2016.
“China’s steady growth will be guaranteed by both strong growth potential and effective macro-control policies,” said Zhang Liqun, a researcher at SIC.
Investment bank Morgan Stanley forecast a China GDP growth of 6.4% in 2017, with a rapid rise in producer prices in the first quarter and mild consumer inflation throughout the year. Monetary easing measures will remain restrained due to asset bubble risks.
Robin Xing, chief China economist with Morgan Stanley, predicted the world’s second largest economy will hold steady, albeit slightly slower from 2016, with fiscal policy serving as the major driving force.
Xing believes in 2017 China’s growth of real estate investment and sales will slow, but the negative effect could be offset by infrastructure investment.
“There is much room for the government to ramp up spending and raise fiscal deficits, and policy banks can still issue a variety of bonds, including special construction bonds, to raise funds,” Xing said.
The Chinese government has planned a 3% deficit-to-GDP ratio for 2016, up from 2.3% last year.
“Looking from a global perspective, China’s advantage lies in its ample room for reforms,” said Xing, adding that China is expected to launch fundamental reforms involving state-owned enterprises, taxation, finance, land, urbanisation, social insurance, ecological civilization and the opening up policy.
Leland Miller, managing director of China Beige Book, a data analytics and economic-forecasting firm focused on China, argued that China would face challenges to keep the economy stable.
“You can’t assume there will be stability next year just because there has to be, there are a lot of dynamics at play that could trip things up. It’s quite worrisome,” Miller warned.
According to China Beige Book’s fourth quarter survey, companies saw higher revenue, higher capital investment and expanded hiring compared with the third quarter, along with steady growth in new orders, which led to another concern, on inventory levels, that hit a record high for the survey’s four-year history.
“The war over corporate health has not been won, and the economy thus remains on unsafe ground. Because China is obviously not a market economy, inventory buildup can continue for much longer than it should. But the eventual production pause is going to be unpleasant,” Miller said.
Economist He Qinglian also expressed concerns on the many challenges China is facing.
He believes that China’s status of world factory has fallen, and it will be very difficult to adjust its industrial structure.
For the past year, up to 4,000 factories closed down in Dongguan, the most famous manufacturing center in China.
“This means the labour-centered economy in China has come to an end,” He warned.
He said China’s resources crisis and local government’s debt crisis will also bring lots challenges for China’s economic stabilisation in the year ahead.
Cui Xiaoyang, a researcher at the Chinese Academy of Sciences (CAS) reckons that the China’s import and export outlook in 2017 is still gloomy.
“Looking into 2017, the revival of global economy is still not optimistic, trade protectionism will make a strong return, and the process of globalization will face new challenges, which will all put pressure on China’s export growth. The import growth is also not optimistic mainly due to slackened domestic demand and reducing processing trade,” Cui said.
Cui expects China’s total import and export volume will see a year-on-year decline of 5% in 2017.
“We expect China’s bumpy deceleration to continue in 2017, as policymakers continue to employ fiscal and credit stimulus to counter diminishing supply-side growth potential,” said Goldman Sachs Research’s chief Asia Pacific economist Andrew Tilton.
“We expect the government to continue to make a push for high levels of infrastructure spending growth, and then consumer spending we think will continue to grow at a pretty rapid clip,” Tilton said.
Goldman Sachs Research believes the necessary stimulus will push China’s domestic inflation somewhat higher in 2017 against the backdrop of a depreciating currency and more reflationary conditions elsewhere. A limited increase in inflation—particularly in the struggling industrial sector—should be welcome for an economy that has experienced one of the biggest debt booms in modern history, and could facilitate a deceleration in leverage growth.
But appropriately calibrating stimulus to maintain employment while avoiding excessive inflation (either in goods/services or asset prices) or increased capital flight will keep policymakers busy in the coming year.
“Sustained debt booms like China’s typically are followed by a range of adverse consequences for the economy, including lower growth, heightened risk of deflationary pressures, and increased risk of financial crises,” said Tilton.
“If the government continues to aim for 6.5% growth or higher, we think inflation risks are tilted towards the upside and may rise further in subsequent years unless the government becomes more flexible with its growth target or pushes growth friendly reforms, such as opening up monopolized industries, more aggressively,” Tilton said.
Goldman Sachs Research forecast the USD-RMB exchange rate to hit 7.30 by the end of 2017.
Michael Pettis, an economist and a professor of finance at Guanghua School of Management at Peking University, shares a similar view with Tilton.
“China’s success will depend on Beijing’s ability to centralize power, to begin to sell off government assets, probably local and provincial, and not central, government assets, to rein in credit growth, and to accept much lower GDP growth rates while keeping household income growth from dropping too sharply,” Pettis said.
According to Pettis, China has overinvested in infrastructure and manufacturing capacity to such an extent that in the aggregate the cost of additional public sector investment exceeds the present value of future increases in productivity generated by the investment. China’s public-sector investment, in other words, is value destroying, and because it is funded by debt, additional investment causes China’s real debt servicing costs to rise faster than its real debt servicing capacity.
“China’s long-term sustainable growth rate is substantially below the economy’s current GDP growth target, and so the economy is only able to meet the growth target by increasing its debt burden,” Pettis warns.