Tag Archives: GDP growth

IMF Sees Increases In China’s Growth And Debt

THE INTERNATIONAL MONETARY Fund (IMF) has upgraded both its economic growth forecast for China in 2018 and the downside risks of debt.

In its July update to its World Economic Outlook, the Fund says its projections reflect the strong first quarter growth this year and expectations of continued fiscal support.

It now says it expects growth next year to be 6.7%, the same as this year and in 2016, and 0.1 percentage point higher than previously forecast. Growth in 2018 is expected to slow by 0.2 percentage points less than previously projected, to 6.4%.

This the Fund believes will be because authorities will sustain high public investment to achieve the target of doubling in real terms 2010’s GDP by 2020. This, in turn, implies that debt levels will not be attacked as actively as needed and financial reforms delayed.

The National Financial Work Conference, the high level policymaking agency chaired by President Xi Jinping that concluded its quinquennial meeting on July 15, emphasized that policymakers’ priority was to deleverage state-owned enterprises (SOEs) within its focus on limiting systemic financial risk.

First, though, Xi has to get through the forthcoming Party plenum, which should provide clues to the strength of his position to tackle the politically powerful interests that control the SOEs.

Leave a comment

Filed under Economy

China’s Growth Spurt Provides Scope To Tackle Debt

TALK OF A hard landing for the economy seems distant, now. China’s economy grew by 6.9% in the second quarter year-on-year, the same as in the first quarter and well ahead of the official target of 6.5%, the National Statistics Bureau reports.

Quater-to-quarter growth quickened to 1.7% from 1.3%. Industrial output (up 7.6% in the first half) and consumption (retail sales were up 11% in June year-on-year) picked up while investment remained strong, suggesting that measures to control the frothy housing market have not yet worked through, or perhaps are not working as effectively as policymakers intended. Property investment increased by 8.5% year-on-year in the first half.

The extent to which property prices cool over the rest of the year will be closely watched. If they do, despite the solid underpinnings of the recovery, the growth rate may moderate in the second half, though not to the extent the official target will be threatened.

The long-term build-up of structural imbalances, manifest in the growing levels of debt, remains, but the latest growth figures give the leadership some scope for pushing through financial reforms at the party plenum later this year.

Some of those, notably the expansion of bond markets to allow direct financing of local governments and enterprises in place of policy lending by banks, will have been thrashed out at the two-day National Financial Work Conference that ended at the weekend.

That this quinquennial meeting chaired by President Xi Jinping was convened a year late this time indicates how politically contentious economic reform remains, not least because they also intend to rein in the debt of state owned enterprises, themselves powerful political fiefdoms.

1 Comment

Filed under Economy

OECD Sees China’s Economy Stabilising But Reform Still Needed

THE OECD QUIETLY prides itself on being the grown-up economic forecaster, eschewing the flash and razzmatazz of the International Monetary Fund or the World Bank for an understated mix of solid economic analysis and policy prescription.

The chapter on China in its latest Economic Outlook fits the bill to a tee: a sparse summary of an economy that is stabilising thanks to earlier policy support, but still needing structural reform if ‘rebalancing’ is to be advanced.

GDP growth for this year is forecast to be one-tenth of a percentage point above the official target of 6.5% and the same below in 2018 — ‘holding up’ despite considerable excess capacity remaining in the industrial sector. Consumption remains robust supported by housing-related purchases, e-commerce and overseas tourism.

While infrastructure investment is being sustained, monetary policy is tightening in response to the risk of financial instability, particularly via the shadow banking sector, and other risks that are mounting. Fiscal policy remains expansionary, however. The headline fiscal deficit will be held at 3% of GDP this year and next, the OECD reckons, but policy lending to prop up growth will also slow the rate of rebalancing.

That will also be slowed by the lack of reform, for example to the social safety net, that is diverting monies that individuals could spend on domestic consumption to precautionary savings. Longer term, the OECD says, corporate deleveraging and working off excess capacity “will be crucial to avoid a sharp slowdown in the future.”

It also quietly but firmly makes the point that longer the debt problem is left unaddressed, the larger it will get, and, by implication, the harder it will be to deal with it.

1 Comment

Filed under Economy

China’s First-Quarter GDP Growth Highlights Rebalancing Shortfalls

MORE UNRUFFLED WATERS for the Chinese economy–at least on the surface. First-quarter GDP growth, as reported by the National Bureau of Statistics, came in at 6.9% year-on-year.

That is its fastest pace in six quarters and the first back-to-back quarterly increase in GDP in seven years. The first-quarter number is also well in line with the 6.5% official annual growth target set last a month.

However, a closer look at the components of growth suggests that deeper currents swirl dangerously, and particularly that the old-school model of state investment-led growth still holds sway. Fixed asset investment in the first quarter, up 9.2%, was an acceleration from 2016’s 8.1% growth rate. Infrastructure investment rose by 23.5% while real estate development was up 9.1%. Industrial production also rose.

Worryingly for the rebalancing of the economy towards greater domestic consumption, retail sales growth slowed to 10% in the first quarter from 2016’s 10.4% expansion.

US President Donald Trump’s backing off from threatening a trade war with China because he needs Beijing’s cooperation in dealing with North Korea has provided breathing room for China’s economy, which it appears to be exploiting with some gusto.

The stimulus that Beijing has given the economy has led the International Monetary Fund to raise its forecasts for China’s growth this year and next in its latest World Economic Outlook to 6.6% and 6.2% respectively. That is 0.1 and 0.2 percentage points higher than its January forecasts and 0.4 and 0.2 percentage points higher than its October 2016 forecasts.

The question remains, however: how sustainable can this pace of growth be long-term without rebalancing taking more substantial hold and the problem of excess leverage being tackled?

As the IMF puts it:

The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment.

At some point, as prime minister Li Keqiang again emphasised, Beijing will have to switch growth gears. That will mean unwinding its most recent stimulus–very carefully. But that is unlikely to start happening until after President Xi Jinping has consolidated his political control at the critical Party plenum later this year.

Leave a comment

Filed under Economy

OECD Edges Up China Growth Forecasts

THE OECD HAS raised its forecast for China’s GDP growth this year by one-tenth of a percentage point from the 6.4% forecast it made last November. It has also raised its 2018 projection by one-fifth of a percentage point, to 6.3%. The 2017 forecast puts it squarely in line with the new official target of ‘about 6.5%’.

Its nutshell summary is:

Growth in China is expected to edge down further by 2018 as the economy manages a number of necessary transitions, including shifting towards consumption and services, adjustment in several heavy industries, working off excess housing supply and ensuring credit developments are sustainable. Demand is being supported by very expansionary fiscal policy, including via policy banks, which in turn is boosting private investment and trade. Producer price inflation has picked up strongly, but consumer price inflation remains low.

The OECD also notes that the rapid growth of private-sector credit and the relatively high level of indebtedness by historic norms is a key risk. Non-financial companies’ high debt levels provide particular vulnerability to a rapid rise in interest rates or unfavourable demand developments, it says. The report also advocates spending be directed at health and education and directed away from adding to financial risks.

The significant uncertainty about the future direction of trade policy globally is a key theme in the report, which makes the self-evident point that a roll-back of existing trade openness would be costly. Around one in seven jobs in China is linked to participation in global value chains.

1 Comment

Filed under Economy

Li Lays Out China’s Economic Goals For The Year

CHINA HAS SET its growth target for this year at ‘around 6.5%’, prime minister Li Keqiang told the annual session of parliament. That is down from 2016’s goal of 6.5%-7% and the outcome of 6.7%.

The glide path to slower but more sustainable growth continues. However, it will be a more cautious approach this year ahead of an important party plenum later this year at which the scope of President Xi Jinping’s second term and eventually succession will be set.

China also faces a more uncertain external environment economy than any time since the 2008 global financial crisis, while the stimulus that staved off deflation last year has left the debt crisis still to be dealt with. While China is perfectly able to deal with that on a macro level, signs of local stress are increasingly apparent.  The finance ministry has again just warned of the ‘the hidden-debt risks of local governments’, especially in the rust belt in the Northeast.

Li’s signalled that the leadership considered 6.5% growth a floor, though if there is any suggestion of social or political instability (and especially instability within the political elites), that floor will, no doubt, be lowered.

Last year, 726,000 workers were shifted out of rust-belt industries; this year another 500,000 will follow, according to the labour minister. China created more than 13 million new jobs last year, according to the official figures, but a further half a million redundant iron and steel workers and coal miners is a lot to absorb, and especially in places where few new industries are flourishing.

Removing excess capacity from heavy industry has proved more difficult than planned as has killing off ‘zombie’ state-owned enterprises.

Rebalancing the economy has also progressed more slowly than Xi laid out when he assumed the leadership four years ago; one reason is that he has repeatedly turned to old-school stimulus whenever the economy looked to be slowing too rapidly.

The government will have work to do to reduce last year’s fiscal deficit of 3.8% of GDP to the wished-for 3.0% (which was also last year’s target).

Li set another ‘about’ target, of ‘about 12%’ for broadest measure of money supply (M2). While that is less than 2016’s target 13%, it is still above end-2016  money supply growth of 11.3%. More monetary policy tightening is likely, barring severe adverse external headwinds.

The military budget will again be restricted to a 7% increase (1.3% of GDP), even though US President Donald Trump has promised a 10% hike in the United States’ defence budget. The United States spends 3.3% of its GDP on defence.

Beijing’s holding fast after decades of double-digit growth will increase the already sizeable spending gap, $600-plus billion a year against $140 billion a year, though off-budget procurement could add a further $50 billion to China’s number and the modernisation of the PLA will continue.

1 Comment

Filed under Economy

World Bank Holds Its Growth Outlook For China Unchanged

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.

china-economy-chartCredit 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.

1 Comment

Filed under Economy