China to Target Economic and Financial Stability to Achieve Growth
China’s 2017 National People’s Congress (NPC) reiterated its policy focus on stability for this year, in line with five-year plans to double the economy this decade. While Premier Li Keqiang announced a “minimum” 6.5% growth target for 2017, it is expected this will be achieved with a commitment to managing economic and financial risks.
Tuan Huynh, CIO APAC and Head of DPM APAC, Deutsche Bank Wealth Management, said, “This commitment comes ahead of the 19th National Congress of the Communist Party of China due to take place later this year. We believe that China will resort to using reasonable means to achieve its growth target, focusing primarily on what is sustainable rather than on what is theoretically achievable.”
He added, “To achieve this growth, policies are likely to be overall neutral. We expect a tighter monetary policy and an accommodative fiscal policy this year. ‘Targeted’ renminbi liberalisation is still likely to allow the yuan to fluctuate gradually, while fiscal policies should be supportive of growth, although we do not expect to see any headline-grabbing measures. With that in mind, we currently expect a slight slowdown in GDP growth to 6.3% in 2017 from 6.7% in 2016, with upside potential. The USD/CNY should also move to 7.30 by end-2017.”
Moving towards an investment-driven, private consumption economy
China can reach its GDP growth target if it wants to, setting aside the economic costs involved. GDP growth seems to be on a cyclical upswing at the moment and manufacturing pulled up the economy by the end of last year.
However, this has come at the expense of high loan growth, a housing boom and government investment support. To achieve sustainable growth, we believe China’s economy ultimately has to rely on private consumption and investment.
China’s emphasis on targeting higher retail sales rather than fixed asset investment reflects the government’s aim to foster such consumer-led growth. As an example, given the uncertain outlook globally, export growth is no longer seen as a driver of economic growth, and to that end, China has not set a target for exports as it did in 2016. Furthermore, according to Premier Li, China expects to push ahead with reforming state-owned enterprises this year, with plans to shift the use of private capital through the reform of ownership laws.
However, infrastructure development does appear to remain an important driver for the Chinese economy. For instance, a total of RMB 800 billion has been planned for new railway works and RMB 1.8 trillion has been set aside for roads and waterways.
Less accommodative on monetary policy, more accommodative on fiscal policy
Expect less accommodative monetary policy and an accommodative fiscal policy in 2017. A weaker yuan will loosen monetary conditions, which is likely to be countered with tighter controls on interest rates to preserve some stability. The fiscal deficit target provides a 8.4% increase from 2016, with sufficient scope for more spending if needed.
However, this implies that leverage will be managed, but not excessively curbed. Indeed, the 12% target increase in M2 is only a small dip from the 13% target in 2016, but Premier Li did note the need to be alert to risks such as “non-performing assets, bond defaults, shadow banking and internet finance.” However, there was little mention of housing risks, which suggests the property market is unlikely to be significantly cooled in 2017.
We are also witnessing a change in the government’s policy towards the Chinese yuan. The NPC saw China drop the line “keeping a stable yuan at a reasonable and balanced level” that featured in the previous three years, and instead said “the renminbi exchange rate will be further liberalised, and the currency’s stable position in the global monetary system will be maintained.
Huynh commented, “We believe this amounts to a targeted, partial liberalisation of the renminbi. Further liberalisation of the currency supports Deutsche Bank WM’s forecast of 7.30 at the end of this year. However, sharp moves are unlikely. Currently, the CNY has been range-bound at 6.85-6.90 for the past few weeks.”