Decent momentum gives hope in a challenging year

While both global trade and China's economy enter 2017 with decent growth momentum, we expect GDP growth to ease to 6.3 percent this year due to a harsher climate for China's exports in the United States, slower real estate investment and, importantly, a change in tone of policymakers toward somewhat less emphasis on growth.

Real GDP growth edged up to 6.8 percent year-on-year in the fourth quarter of 2016 as services output momentum picked up. This brought whole-year GDP growth to 6.7 percent, down from 6.9 percent in 2015 but comfortably exceeding the "bottom line" of the 6.5 to 7 percent target range.

However, this was at the cost of a further rise in leverage. Overall credit - total social financing excluding equity financing, but including local government bond issuance - grew 16.1 percent in 2016.

Rebalancing continued last year. With the services sector outpacing industry and price changes also in favor of services, its share in GDP climbed by 1.2 percentage points to 51.9 percent.

Investment momentum picked up in the fourth quarter of 2016, having weakened mid-year, with growth of fixed asset investment rising to 7.9 percent, supported by some improvement in corporate investment. Surprisingly, real estate fixed asset investment also accelerated again in the fourth quarter in spite of measures taken in large cities to contain housing price increases.

Consumption remained robust in the fourth quarter, with real retail sales growth 9.1 percent, although passenger car sales slowed in December.

The growth in exports of real goods slowed to 1.4 percent year-on-year in the fourth quarter. But the three month moving average, the seasonally adjusted monthly export volume, rose a full 4 percent in December, pointing to solid export momentum going into 2017.

Consumer price inflation eased in December to 1.9 percent year-on-year on lower food price increases. While the producer price index rose a full 5.5 percent year-on-year, we expect the spurt to run out of steam in the first half of 2017 and forecast consumer price index inflation to remain comfortably below the likely target of 3 percent in 2017, suggesting no major monetary policy implications.

Looking ahead, recent global trade indicators show a decent momentum going into 2017 and we expect it to grow by 2.7 percent this year, from 1.4 percent in 2016. Indeed, China should in principle benefit from any pick-up in growth in the US from more expansionary fiscal policy under the new Trump administration. But, while we do not expect across-the board tariffs, it is clear to us that China's exports to the US will face a harsher climate. Overall, we expect the export outlook to improve somewhat next year.

Domestically, infrastructure investment should remain solid. And corporate investment should benefit from renewed profit growth. But the tightening of housing purchasing restrictions in many large cities will weigh on real estate investment. We expect consumption growth to ease further on moderating wage growth, but to remain relatively solid.

Meanwhile, the messages from the Central Economic Work Conference and other recent statements suggest policymakers are moving to put somewhat more emphasis on reducing financial risks and less on ensuring at least 6.5 percent GDP growth. The Central Economic Work Conference provided a mandate for further fiscal expansion but called for a less generous monetary stance. We do not expect a benchmark interest rate rise this year but expect policymakers to guide overall credit growth down to around 14 percent in 2017.

Overall, we expect GDP growth to slow to 6.3 percent this year. High uncertainty means Chinese economic policymakers will want to keep their options open. But at least the reasonable current growth momentum gives policy some two-way leeway.

The author is the Hong Kong-based head of Asia economics for Oxford Economics.

(China Daily 01/21/2017 page5)