China maintains economic momentum
The latest economic data indicate a steady pace in the Chinese economy as 2016 draws to a close. But while we don’t expect a hard landing, 2017 will bring challenges for China on many fronts.
The latest data releases out of Beijing indicate steady momentum in the Chinese economy. Exports are showing signs of recovery and investment in manufacturing is helping to offset a recent drop in property investment. All in all, the latest data releases are consistent with our full-year GDP forecast of 6.7% in 2016. Looking ahead, we do not foresee a hard landing for China, but expect its growth rate to decline to 6.2% in 2017. However, persistent capital outflows may put constraints on the Chinese authorities’ ability to adapt monetary policy to changing economic circumstances.
Fixed asset investment (FAI) grew by 8.8% y-o-y in November (8.3% y-o-y January through November), the same as in October. Growth in infrastructure investment softened somewhat in November, but remained a healthy 13.7% in November. Property investment dropped more significantly, but was offset by a strong pickup in growth in manufacturing investment. The recovery in manufacturing FAI likely reflects a lagged response to the rebound in the prices of industrial goods, as indicated by the rising producer price index. Property investment may head gradually lower next year as the government intervenes to deal with concerns of a property bubble, but could be offset by an increased emphasis on infrastructure spending.
Retail sales rose by 10.8% y-o-y in November, up from 10% in October. Auto sales, including 40% y-o-y growth in sales of SUVs, continue to indicate a strong appetite for spending among the middle class.
International trade. Chinese exports came in at USD196.8 billion in November, rising 0.1% year-over-year (y-o-y), compared with a 7.5% drop in October. Imports came in at USD152.1 billion in November, rising 6.7% y-o-y, compared with -1.4% in October. Chinese exports to developed economies generally improved in November, but demand from emerging markets was less upbeat. Besides the gradual recovery in global demand, especially in the US, the notable depreciation of the renminbi may have contributed to the rebound in Chinese exports.
The export sector’s contribution to China’s GDP growth could turn slightly positive in 2017 based on economic factors. Although China’s reliance on exports has fallen significantly in recent years, China’s export sector may face more headwinds in 2017 if the incoming Trump administration leans towards protectionism.
Currency reserves. China’s FX reserves amounted to USD3.05 trillion at end November 2016, dropping by USD69 billion from the previous month. Several factors contributed to this decline – currency valuation, mark-to-market investment losses and capital outflows. We estimate that monthly capital outflows from China averaged about USD30 billion in April through November, compared with a peak of USD156 billion in December 2015.
In response to the renewed rise in capital outflows, we expect the People’s Bank of China to further tighten its control on the capital account. Among the more recent measures announced was one to restrict large overseas M&A by Chinese corporations. We expect the enforcement of this and other measures to be strengthened going forward. In our base-case scenario, we do not expect the PBoC to cut interest rates or the required reserve ratio (RRR) in the rest of 2016 or in 2017.