China: A “satisfactory” 2016 is yet to set the tone for 2017?
By Coface, the international trade credit insurance company
China’s real GDP growth improved slightly year-on-year (Y-o-Y) to 6.8% in Q4 of 2016 from 6.7% in each of the first three quarters in 2016. This was slightly above expectations of 6.7%.
2016 annual growth was also 6.7%, down from 6.9% in 2015, marking the slowest pace since 1990, albeit within the official target range from 6.5% to 7.0%.
The three key monthly economic indicators released on the same day pointed to stabilisation, despite the disappointing merchandise trade figures released a week earlier which suggested that the challenges of external demand would probably remain, with a fall of 6.1% in merchandise exports (USD value) in December (Consensus: -4.0%; November -1.6%). This is in addition to the Trump administration’s trade policy uncertainties.
Industrial production growth slowed slightly to 6.0% Y-o-Y in December (Consensus: 6.1%; November: 6.2%).
Retail sale growth accelerated to 10.9% Y-o-Y in December (Consensus: 10.7%; November: 10.8%).
Urban fixed asset investment (FAI) growth slowed to 8.1% Y-o-Y (YTD) in December (Consensus & November: 8.3%), while the private fixed asset investment growth improved modestly to +3.2% YTD (Y-o-Y) in December from +3.1% in November.
All in all, China’s National Bureau of Statistics (NBS) appeared to be happy with the 2016 economic performance describing it as “having achieved the favourable beginning of the 13th Five-Year Plan (2016-2020)” in the press release1, and Ning Jizhe, Head of NBS, said “GDP growth of 6.7% is a medium, high pace of expansion”, at a briefing, according to Bloomberg.
Why was China’s economic growth for 2016 satisfactory?
2016 started with highly volatile world financial markets led by China, mainly due to the botched introduction of economic circuit breakers, against the backdrop of the fears of a hard-landing, a depreciating Chinese yuan and capital outflows from emerging markets. GDP growth of 6.7% confirmed a soft-landing for the second largest economy in the world, despite mounting global uncertainty with Brexit in June and the Trump victory.
External demand was largely muted, with a further decline in merchandise exports and net exports representing -6.8% of real GDP in 2016. Arguably, the Chinese renminbi declined 6.5% against the US dollar in 2016, followed by a drop of 4.4% in 2015, probably providing a buffer. The renminbi depreciation prospects also created some challenges for the Chinese authorities who started to introduce stricter capital outflow measures and some friendlier measures to attract capital inflows, apart from using forex reserves that dropped to US$ 3.01 trillion at the end 2016.
The “medium, high” economic growth was mainly due to a combination of fiscal stimulus and accommodative monetary policy (such as relatively easy credit conditions and record-low benchmark interest rates) at the expense of rebalancing.
The impact of the policy mix in 2016, especially on driving real estate investment and state-owned enterprises, led FAI growth, which is worrying. Strong real estate investment growth amid the skyrocketing home prices in the first- and second-tier cities and what NBS described as “reasonable” private debt levels, with the total credit to the private non-financial sector at 209% of GDP as of Q2 20162. This created some concerns and will probably continue to be in the spotlight this year.
Since late Q1 last year, the Chinese government began tightening home-buying policies in some key cities to moderate home prices increases. This is likely to dampen sentiment on residential investment in China’s first and second tier cities that have experienced sharp price gains.
Consequently, real estate, which represented 6.5% of GDP3 in 2016 would become a less likely growth driver this year, probably casting a shadow over construction, construction materials (such as metals and cement), and to a lesser extent, consumer goods (such as furniture and home appliances) and furnishing services.
The Blue Book 2017, published by the Chinese Academy of Social Sciences, pointed out that the heavily indebted private non-financial sector was due to state-owned enterprises which would probably continue to undergo reform.
The breakdown of industrial production and urban FAI investment could provide some good sector insights for 2017.
Expansion in motor manufacturing moderated in December (16.2% vs. 19.5% in November) amid the adjustment of the Chinese government’s tax incentive for buyers of cars with engines up to 1.6 litres where the tax rate will be increased to 7.5% in 2017 and 10% in 2018. This will probably slow the growth of vehicle sales to about 3%-5% in 2017 according to the China Association of Automobile Manufacturers (vs. +14.9% in 2016).
Production activity in telecommunication and computer sector expanded at a faster pace at 13.5% in December (November: +8.9%), in addition to a solid FAI growth of 15.8% in 2016 (vs. average all industry FAI growth of 8.1%), indicating some good growth potential in this sector.
All in all, 2017 is set to be another challenging year for China with further growth moderation (+6,3 % according to Coface) and rising financial risks.
Source: NBS’s Press Release (January 20, 2017)
Source: Bank for International Settlements (Last Updated: December 11, 2016)
This is according to NBS at the briefing (January 20, 2017).
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