THE WORLD BANK has left its growth forecasts for China to 2019 unchanged from its projections published last June. In the latest edition of its Global Economic Prospects, the Bank reiterates its view that growth this year will slow to 6.5% from 2016’s 6.7%, and then slow further to 6.3% in both next year and 2019.
The Bank takes note, however, of “resurfacing concerns about buoyant property markets, as growth slows gradually toward more sustainable levels, with a rebalancing from manufacturing to services”.
There is little unexpected in the Bank’s sketch of the economy. Growth has been concentrated primarily in services, while industrial production has stabilized at moderate levels. Strong consumption growth highlights the internal rebalancing on the demand side. Investment growth has continued to moderate from its post-crisis peak, concentrated in the private sector; investment by the non-private sector accelerated in 2016. Fiscal and credit-based stimulus to growth in 2016 focused on infrastructure investment and household credit.
Credit growth remains well above the pace of nominal GDP growth, with loans to households accounting for an increasing share of credit extension in 2016 on the back of a continued real estate boom, especially in first-tier cities. The ratio of household debt to GDP has surpassed 40%, up almost 10 percentage points over the past three years. Meanwhile, the ratio of non-financial corporate sector debt to GDP reached 170% in 2016.
Producer price deflation came to halt as input prices stabilized. If the cycle has swung back to reflation, as an uptick in global commodity prices as well as recent producer price index numbers might indicate, that would be a significant turning point.
Capital outflows remained sizable last year and continued to put downward pressure on the currency. During 2016, the renminbi depreciated by about 5% in nominal trade-weighted terms (and some 7% against the US dollar) albeit broadly in line with fundamentals.
The renminbi was added to the basket of currencies that make up the International Monetary Fund’s Special Drawing Right in October last.
Soft external demand, heightened uncertainty about global trade prospects and slower private investment are the key risks to the growth outlook for this year. Macroeconomic policy is likely to remain supportive. Meanwhile, rebalancing from industry to services and from investment to consumption is expected to moderate.
Progress in reducing financial excesses will likely be similarly modest, barring deep structural reforms to state-owned enterprises and corporate restructuring — both highly unlikely in a year that will see a party plenum that will start to line up the next generation of top political leadership. No sharp policy changes will be implemented which would raise disruption risk, even though the longer it takes to tackle deleveraging the higher the eventual cost will be.