Stable 2017 Expected, Despite Global Uncertainties
Given China’s strong fiscal condition, we expect the country to enjoy stable growth in 2017, global uncertainties notwithstanding. GDP rose 6.7% y/y in 2016, down 0.2 pps from 2015, and admittedly the lowest recent yearly rise. Fixed asset investment was up 8.1%, down 1.9 pps from 2015. After the most important meeting of 2016, top Chinese leaders’ December central economic workshop, it was announced that 2017 policies would lean toward fiscal efforts, rather than the loosening of monetary policy. An early indication of future tighter monetary policy is a rise in the repo rate, the interest rate for major commercial banks to borrow from the Central Bank. Per a February 3rd announcement, the rate will rise from 2.25%, its level since October 2015, to 2.35%. Expectations of a tighter policy have already halted further yuan depreciation. The meeting participants also stated that housing is for living, not speculation. We expect the housing market to cool further, and that more cities will start experimenting with real estate taxes, to tamp down speculation.
Import and export behavior diverged in 2016. Total exports fell -7.7% y/y, down 4.9 pps from 2015, while imports fell -5.5% y/y, up 8.6 pps from 2015. Producer prices have been recovering. The ex-factory price of industrial goods first turned positive in September 2016, and quickly expanded to 5.5% y/y in December. We expect rising producer prices to translate into higher CPI in 2017. Fiscal revenue rose only 4.5% in 2016 after tax cuts, while spending increased 7.6%. The expected fiscal expansion in 2017 might generate a deeper deficit.
U.S. President Donald Trump stated during his campaign that, after taking office, he would list China as a currency manipulator. According to the three standards set by the U.S. Treasury, China only meets one of these conditions, so China is very unlikely to be listed as a manipulator. But, given the large bilateral trade imbalance, China needs to do more, such as to address the ongoing structural transformation, in addition to its currency actions, to balance its trade relations with the United States.
Trump’s public tweets threatening a 20% tariff on Mexican exports to the United States were attention-getting. Trump campaigned on increasing trade protection, and China is definitely on his target list. But we expect the United States to be the bigger loser in any U.S.-China trade war. The Chinese economy is more flexible, and can substitute jobs with its large fiscal capability, given its low national debt. China also mainly plays the role of processing trade, which means the negative impact would be transferred to other economies. Conflict between these two large economies would eventually lead investors to take refugee in the dollar. And major dollar appreciation would hurt the U.S. economy even more.
Now read on...
Register to sample a report