Trade Uncertainties Ahead
The economy in 2016 displayed completely new characteristics. On the one hand, real estate and automobile consumption recovered strongly, and M1 grew rapidly. Producer prices rebounded, to positive territory. On the other hand, quarterly GDP growth rates were almost flat all year. It seems that even positive factors could not raise growth any further.
GDP in 2016 rose just 6.7% y/y, down 0.2 pps from 2015, the lowest recent yearly rise. Quarterly growth was stable, rising 6.7% in the first three quarters, and 6.8% in Q4. Fixed asset investment in 2016 rose 8.1%, down 1.9 pps from 2015. The year’s most important meeting, the central economic workshop held by Chinese top leaders, which ended December 16th, states that the policies for 2017 will lean toward fiscal rather than monetary policy, which has been loosened, but with only minor impacts. The meeting also stated that housing is for living, not for speculation. We expect the housing market to cool further, and that more cities will start to adopt real estate taxes, to beat speculation.
There was divergence between imports and exports in 2016. Total exports fell -7.7% y/y, down 4.9 pps from 2015, while imports fell less, down -5.5% y/y, and 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. PPI turned positive starting in October, and rose 6.3% y/y eventually in December. We expect rising producer prices to translate to higher CPI in 2017. Before July, M1 growth rate steadily increased, reaching growth rate of 25.4% y/y at its peak. But after that, M1 growth fell continuously, rising 21.4% y/y in December, and m/m growth was negative after considering seasonal factors. We expect monetary policy to be neutral in 2017.
U.S. President Donald Trump’s consideration of a 20% tariff on Mexican exports to the United States was notable. Trump campaigned on trade protection, and China is definitely on the U.S. list of potential tariff increases, or in line to be labeled as a currency manipulator. 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. The financial market would react instantly to any trade friction, and 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.
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