China's economy will stabilise in 2017 but challenges weigh on outlook

China's economy will stabilise in 2017 but challenges weigh on outlook

Beijing - CHINA'S economic activity will continue to stabilise in 2017 but lack of structural reforms and mounting debt will weigh looking forward.

Analysts say the stimulus measures implemented over the past 18 months will continue to prop up growth into 2017, but will gradually ease out.

They add that structural challenges such as overcapacity and ballooning debt still have to be addressed and a tepid global environment will all pose risks next year.

Capital outflows will also persist amid a stronger US dollar and possible protectionist measures from the US.

"China remains on course for a soft landing, as the government successfully manages a bifurcated economy in which the industrial trade sector continues to decelerate while domestic services expand steadily," said Credit Suisse analysts in a note to clients.

Most analysts say GDP will grow between 6.5-6.7 per cent this year and around 6.3-6.5 per cent next year as the stimulus wanes.

Monetary policy is expected to remain stable with interest and reserve ratio rates to remain set.

Last March Premier Li Keqiang set a growth target of between 6.5-7 per cent for the five years to 2020. While China seems set to reach that target this year, it has once more resorted to massive credit growth and government-led infrastructure spending to spur the economy.

As a result, business sentiment is picking up with PMIs (purchasing managers' indexes) rebounding strongly, prices at factory gates which fell for over four years are back in positive territory and both car and housing sales are now strong. Private investment, a key pillar of the economy, is recovering modestly.

"Over the course of 2016, economic activity has stabilised to a greater degree than most people have anticipated earlier in the year. The combination of an expansionary fiscal policy and a rebound of the housing market has led to an acceleration in construction activity, giving a much needed lift to demand for raw materials and machinery," said HSBC China economist, Qu Hongbin.

But that comes at the cost of delaying deleveraging and structural reforms of inefficient state-owned enterprises (SOEs) that are still eating up credit allocated by banks. Many local governments are weary of closing steel mills with excess capacity or coalmines that bring in taxes and create jobs.

"China needs SOE restructuring, deleveraging and deregulation. But these reforms hurt growth in the short run, which we doubt Beijing will tolerate in a year in which politics will likely trump economics, with key leadership changes. We expect the government to do whatever it takes to achieve GDP growth of around 6.5 per cent, but beneath the surface vulnerabilities are festering," said Nomura China analyst Yang Zhao.

The Communist Party will hold its 19th National Party Congress next autumn during which General Secretary Xi Jinping is expected to further consolidate his power and appoint key positions, as many State Council members retire. Until then stability is expected to be the key word among local party leaders; many of which have vested interests in China's web of SOEs.

The main risks next year will be pressures on the People's Bank of China to haemorrhage capital outflows, trade frictions with the US and corporate defaults.

The property market will also need to be cautiously monitored. Targeted measures to cool the market in tier 1 and 2 cities have already started to have effect with investment slowing down in those cities.

"In 2017, Chinese policymakers will face an increasingly difficult task of ensuring a gradual economic slowdown amid downside pressures from structural adjustments, while at the same time, conducting market-driven reforms and maintaining financial stability," BMI Asia country risk analyst Chua Han Teng.

This article was first published on Dec 15, 2016.
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