China: near-term prospects good, mid term less clear
Rising debts and the risk that the Trump administration introduces protectionist policies are headwinds for the Chinese economy.
Chinese GDP grew by 6.8% in Q4 2016 and by 6.7% in 2016 as a whole, in line with our forecast. The pick-up in fixed-asset investment in the second half was probably the key contributor to this solid performance.
The likelihood of a sharp deceleration in fixed-asset investment in Q1 2017 has declined greatly. Growth in infrastructure should pick up again this month and new housing development remains resilient (growing 12% on average y-o-y in Q4 2016). Inflation is rising moderately, resulting in continued improvement in nominal GDP growth (9.9% in Q4 2016, the highest in three years). This should help boost corporate profitability and companies’ ability to service their debts.
However, uncertainties still cloud China’s medium- and long-term prospects.
The tremendous amount of debt that China has accumulated since the global financial crisis is the greatest near-term challenge China faces. We estimate that China’s total debts had risen to 261% of GDP by Q3 2016. Almost half of these debts, or roughly Rmb86.8 trillion (USD12.6 trillion), are concentrated in the non-financial corporate sector, but the growth in indebtedness is faster in the financial and household sectors.
Alarmed by the rapidly rising leverage, China’s policy makers have stepped up measures to contain the growing financial risks. The country’s top leadership recently set out prudent, neutral monetary policy guidelines for 2017, with curbs on financial risks and asset bubbles seen as a priority. In parallel, measures have been introduced to cool the property market, and the People’s Bank of China has allowed the money market rate to rise to squeeze leverage in the bond market. Higher interest rates and slower credit growth will likely weigh on Chinese growth in 2017.
On the external front, China may face threats from the incoming Trump administration. We believe it is highly probable that the US will launch more anti-dumping cases against China and some China exports to the US may face steep tariffs. The burgeoning improvement in China’s exports in recent months may be compromised by Trump trade policies.
With all these considerations in mind, we forecast that China’s GDP growth in 2017 will slow to 6.2%, and that the government’s fiscal support will be crucial to achieve such growth.