Macroscope | These three major China themes will be pivotal in 2017
China’s economic growth target, the depreciation of the yuan and a looming change in several senior Communist Party positions will be important factors in the year ahead
After a turbulent 2015, 2016 turned out to be a decent year for the Chinese economy. Economic growth was steady at 6.7 per cent throughout the first three quarters and should print at similar levels in the fourth quarter, allowing Beijing to achieve this year’s target. In addition, the government has managed to make some progress on a number of structural reforms, such as reducing industrial overcapacity, restructuring the corporate sector and liberalising the financial market.
Against these achievements however, a number of old ills in the economy have deteriorated further. Chief among them is leverage, as credit growth continued to outstrip nominal GDP growth. Inefficiency of credit usage remains a deep concern as liquidity continued to be channelled by state-owned enterprises and into the property market. As a result, the overall debt-to-GDP ratio is expected to climb above 260 per cent by end-2016.
Externally, the focus on the yuan and capital outflows has been intense ever since the foreign exchange regime change last August. The recent strength in the US dollar has put pressure on China’s external account, prompting the authorities to tighten capital controls and step up forex intervention. The US dollar/yuan could break the psychological level of 7.0 by the year-end, if the dollar rally continues apace.
Looking ahead to 2017, three themes are worth pondering for China watchers – growth, yuan and politics.
On growth, Beijing reiterated its growth target of 6.5 per cent for 2017 at the Central Economic Work Conference earlier this month.
This will serve as a binding constraint for economic policies in a year of leadership transition, where macro stability will be valued dearly.