Opinion: Global Economic Recovery to Also Boost China
The growth momentum of the global economy remains positive for the rest of 2017, generating a wide range of recovery in the U.S., the eurozone, Japan and China. Macroeconomic performances have always beaten market expectations.
Looking ahead to 2018, major organizations such as the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) predict the global economy will further improve, although growth rates will remain moderate and volatility will be low.
While the base case for the world economy is optimistic next year, there are potential risks elsewhere. These include geopolitical concerns surrounding North Korea, uncertainty related to the monetary policies among central banks, and the rise of trade protectionism. There are still many structural and institutional challenges that need to be dealt with.
Momentum likely will continue
Assuming the global economy continues to be on track toward recovery, what is the assessment for China in 2018?
First, the current momentum will continue, and a base case sees China’s growth decelerating slightly in 2018 from the current 6.9%, to 6.7-6.8%, which is higher than many other predictions.
Second, the high producer price index (PPI) this year will start to transmit downstream next year to the consumer price index (CPI), in particular the core CPI. The CPI will increase to 2.0% in 2018 from its current level of 1.6%. The transmission will make China’s recovery more balanced and sustainable. The People’s Bank of China will maintain or slightly tighten up its current “stable and neutral” policy stance. Also, another round of fiscal stimuli is unlikely, given China’s deleveraging policy. The movement toward normalization of currency and fiscal policy encourages the market to play a more important role in the process of recovery.
Third, in terms of fixed asset investment, the growth will marginally slow from the current 7.5%. Among the three categories of fixed-asset investment, the government-related infrastructural investment will maintain the high growth rate (currently 20%), the manufacturing capital expenditure investment (currently 4%) will increase slightly, and real-estate investment (current 8%) will continue to cool down.
Fourth, China’s yield curve has been quite flat, and the convergence of the interest-rate spread between long- and short-term bonds shows that market confidence needs to be further built up. It will increase the short-term funding cost and may trigger a liquidity crisis in the financial market. The spread widening is expected to make some progress next year.
Fifth, China’s exports will continue to benefit from a steady global recovery in 2018. The growth rate of imports will continue to outpace the growth rate of exports due to robust domestic demand, and therefore, the current account surplus should shrink gradually. Nevertheless, net exports as a drag on gross domestic product growth could be marginally improved.
Sixth, in terms of the Chinese stock market, I think blue chips are still undervalued, and now in a position to pick up along with economic fundamentals, which continue to improve. Among different sectors, while the new economy represents the future of Chinese business, the companies related to these sectors are currently trading at a high valuation compared with global peers. The proposed shifting from an approval system to a registration system for listing of companies could make the market revalue the stocks related to the new economy, since the price of listed companies in these sectors under the current approval system contain the regulation premium. As a whole, the stock market will go further up with some volatility next year.
Yuan stability seen
The U.S. Federal Reserve will continue to tighten its monetary policy gradually in 2018, and progress in U.S. tax reform will support the U.S. dollar next year. In China next year, the yuan will remain stable, and control of the capital account could be slightly relaxed. However, in the midterm, the yuan is still in the process of a gradual depreciation.
The structural and institutional risks
While the current recovery has been mostly cyclical, China still faces structural and institutional risks.
There are two key structural risks. One is a very high macro debt ratio, and another is the severe overcapacity in certain industries. Also, there are two institutional risks in China: One is the distortion between the dominant role of the government and the fragile function of the market; another is the unbalanced development between state-owned enterprises and private sectors.
A positive outcome would be to heavily rely on market-oriented reform through a combination of tax reduction, corporate deleveraging and macroprudential measures.
Qin Xiao is a former chairman of China Merchants Group and China Merchants Bank.
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