2017 China’s Macroeconomic Analysis and Forecast (Issue No.2) China’ s Economy Strive to Bottom Working Papers(No.78) Center for China in the World Economy, Tsinghua University Issued on March 12, 2017
2017
China’s Macroeconomic Analysis and Forecast
(Issue No.2)
China’s Economy Strive to Bottom
Working Papers(No.78)
Center for China in the World Economy, Tsinghua University
Issued on March 12, 2017
China’s Economy Strive to Bottom
■ China’s economic situation: Fixed asset investment – its growth is expected to slowly rise, and the trend
will decline in the first half but rise in the second half of the year.
Real estate – its growth rate goes down, continuing to adjust.
Import and export – the risks increase in global trade and the export is
difficult to keep slow recovery.
Price index - CPI maintains a smooth running. PPI lacks of momentum for
rising.
Corporate profits – Growth continues but narrows.
Consumption - car sales stamina is insufficient; retail growth is not
optimistic.
■ China’s economic risk: Exchange rate and capital flows - the RMB exchange rate tends to
stabilize and the pressure of capital outflow slows down.
Deleverage - the government has a room for debt and orderly guide the
bond default.
■ “Trump risk” still exists, be vigilant of domino black swan.
■ Expert column Li Daokui: Create conditions, and strive to make China’s economy in the
bottom of this round of growth adjust in 2017.
Yuan Gangming: China’s economy can only move from virtual to real and
keep stable in slowdown.
CCWE Macro Forecast Project
Members:
Li Daokui, Yuan Gangming,Like
Aobo,Feng Ming, Wu Shuyu, Shi
Jinjian, Zhou Di, Jin Xingye, Hu
Sijia, Chen Dapeng, Zhang Chi,
Chen Yifan, Wang Xushuo
Contact information
Tel: 010-62797782
Website:
www.ccwe.tsinghua.edu.cn
Data source: National Bureau of
Statistics, People's Bank of
China, CCWE
For 2016, China’s GDP growth rate was 6.7%, hitting a lowest record for the
past 26 years. However, the bottoming process has not yet ended. Since the second
half, some economic data happened to positively change as the trend to stabilize at
certain stage stood out, which was embodied by narrowing of decline in the growth
and improvement of the growth quality and efficiency. The trend in slowing of
decline and being stable began to occur. The “steady progress” will become the
overall tone for the economic work in 2017.
In 2016, China’s Marco-economy had three important bright spots. First, the
economic structure continued to improve; Second, the right to speak in the
international economic and financial areas continued to improve; Third, new
economy, new format and new momentums were emerging and grew up as to
become the important impetus to drive economic restructuring and movement
conversion. In 2017 China’s economy is facing three major risks: first, the
international situation is chaotic, especially Trump’s new policies may bring
uncertainty to the international economic and financial environment; second, the
financial sector is facing the continued depreciation of RMB and capital outflows,
banks’ non-performing rate increasing, high leverage ratio of non-financial
enterprises and risk of local government debt fermentation; and third, the growth rate
of private investment and its closely related manufacturing investment is wandering
at a low level, and the sustainability of periodic recovery is waited to be observed.
Based on the above analysis, the CCWE predicted that China’s economic
growth rate would be 6.6% in the first half of 2017, and the annual growth rate 6.6%.
2015 2016 First half of
2017
2017
GDP (%) 6.9 6.7 6.6* 6.6*
CPI (%) 1.4 2.0 2.0* 2.1*
PPI (%) -5.2 -1.4 6.9* 6.0*
Export, year on year (%) -2.8 -7.7 -2.0* -3.5*
Import, year on year (%) -14.1 -5.5 0.5* -0.5*
M2 balance, year on year (%) 13.3 11.3 12.4* 11.9*
Retail, year on year (%) 10.7 10.4 10.2* 10.0*
Fixed assets, year on year (%) 10.0 8.1 8.3* 8.6*
Note: * represents the forecast value, all indicators are the accumulative year-on-year
growth from the beginning to the end of the year, except for M2.
GDP growth, quarterly accumulative
year on year
CPI growth, quarterly accumulative
year on year
Growth in fixed asset investment,
quarterly accumulative year on year
M2 growth, quarterly accumulative
year on year
Center for China in the World Economy 1
I. China’s economic situation
Since the second half of 2016, China’s economy began to show a steady trend, and most of the economic data
have happened to positive changes. In view of the macro data, since the beginning of the year private investment
stopped a cliff-drop decline and began to stabilize from August, directly leading to phase stabilizing of investment
growth. Industrial enterprises significantly improved their profits, and the annual growth rate (8.5%) increased by
10.8% compared with 2015 (-2.3%). The year-on-year growth rate of PPT ended a four and a half year of negative
growth in September, 2016, back to the growth range. In view of the micro data, power generation, freight volume,
and performance of listed companies have improved to varying degrees. Overall, although China’s economy is still
in the bottoming process, 6.7% of GDP growth also hits the lowest record for the past 26 years. However, the
decline in economic growth rate continues narrowing, and the quality of economic growth continues to increase as
the trend gradually appeared: the decline became slowing and steady, and even the economy turned good. The
“steady progress” become the overall tone of economic work in 2017.
Looking back 2016, China's economy presents three bright spots. First, the economic structure continues to
improve. From the industrial structure, in 2016 the proportion of added value of the tertiary industry reached 51.6%,
1.4 % higher than in 2015. The industry internal structure is also constantly adjusted and optimized. The high-end
manufacturing of the secondary industry and the financial services, and the internet services of the tertiary industry
continued to grow in the proportion. From the domestic demand, investment and consumption structure continued
to improve and the contribution rate of final consumption to economic growth in 2016 was 64.6%. According to the
Center for China in the World Economy (CCWE) of Tsinghua University, the proportion of China’s consumption in
GDP in 2016 would exceed 47%, and over 50% expected by 2020. The investment-driven growth model is
gradually changing. From the foreign trade structure, despite of severe situation and increasing volatility, the export
structure has continued to improve. High-tech, high value-added exports represented by high-speed rail,
communications equipment manufacturing, machinery and heavy industry are rising in the proportion. Second,
China’s voice in the international economy and financial fields continues to improve. On the one hand, China’s
GDP growth in 2016 ranked the first among the world’s major economies, contributing more than 30% to the
world’s economic growth and continues to play the most important engine of global economic growth. On the other
hand, China successfully held the G20 Hangzhou Summit in 2016. President Xi Jinping made an important speech
at the Davos forum, the RMB entered SDR, AIIB and BRICS Bank were in smooth operation, and the “belt and
road” strategy made positive progress. All the activities indicate that China is carrying the banner of international
economic and financial governance and the right to speak in the international community continues to improve.
Lastly, new economies, new industries, and new momentums are emerging and growing and become the important
impetus to boost the economic restructuring and momentum conversion. New strategic industries represented by
high-end equipment manufacturing, new energy and new materials, new generation of information technology,
bio-pharmaceuticals, energy conservation and environmental protection have accounted for 10% of GDP. The
sharing economy represented by Mobai and Ofo sharing bicycles develop rapidly and become all the rage at the
moment, as a classic practice of “Internet + traditional industry”.
Looking ahead 2017, China’s economy is facing three major risks. First, the international situation is chaotic,
especially Trump’s new policies may bring uncertainty to the international economic and financial environment.
Trump came to stage and may implement trade protection, infrastructure investment, the FED’s rate hike, fiscal
stimulus and other measures that will have an impact on the global economic and financial markets, especially for
China’s export growth and exchange rate stability. The EU’s weak economic recovery, political elections, refugee
problems, poor banking, conservatism and other issues will bring uncertainties to the EU and the global economic
growth and financial stability. The differentiation between developed and emerging economies and among
Center for China in the World Economy 2
emerging economies will further stand out and the global liquidity may face a short-term inflection point. Second,
the domestic financial sector is facing potential risks, and improper response may bring disaster to the overall
situation of “steady progress”. On one hand, depreciation of the RMB exchange rate and the risk of capital outflows
still exist, and their feedback loop tends to deteriorate. On the other hand, the bank’s non-performing rate slows
down, but has not been fundamentally curbed. Lastly, the leverage rate of non-financial enterprises is relatively
high, and the risk of local government debt gathering is still fermenting. Third, private investment and its closely
related manufacturing investment are still hovering around 4% in terms of the growth rate. The stainability of
periodic recovery needs to be observed. Especially the current problem of “moving from real to virtual economy” is
quite serious, and the spontaneous power from private investment is still insufficient, under these circumstances,
the foundation isn’t enough strong for private investment, accounting for more than 60% of the total investment, to
stabilize. This will directly affect realization of stable investment and growth target.
Based on the above analysis, CCWE predicts that China’s GDP growth rate would be 6.6% in 2017.
1. Fixed asset investment: growth is expected to recover slowly and the trend will go down in the first half
but up in the second half of the year
For the whole year of 2016, the national fixed asset investment amounted to 59.6501 trillion RMB, year on
year up by 8.1%. The investment growth has been stable more than 8% for five consecutive months, and the
characteristics of periodic recovery further appeared. Investment growth declined from 10.2% at the beginning of
2016 to 8.1% at the end of the year, the trend was high in the first half but low in the second half of the year. The
sharp decline in manufacturing investment and private investment growth is the main reason for the slowdown in
investment growth throughout the year, while infrastructure investment and other investments1 have become the
main force of stable investment. The decline in manufacturing investment and private investment growth has
dragged down the fixed asset investment in the year by 1.2 % and 4.3% respectively. From the contribution to fixed
asset investment growth, infrastructure investment and other investment contribution rate was 39.2% and 29.4%
respectively, which together led to nearly 70% of investment growth. In 2016 real estate investment growth (6.9%)
happened to a substantial rebound, compared to 1% growth rate in 2015 than, but still lower than the overall
investment growth. It means that real estate investment growth is still dragging the overall investment growth, but
releases a little compared to 2015.
Figure 1 Year-on-year growth of fixed asset investment and components
Source: National Bureau of Statistics
Looking ahead 2017, investment growth is expected to achieve a slow recovery, the trend would be low in the
first half but high in the second half of the year. It will mainly benefit from the slow recovery in manufacturing
1 Other investments are defined as: other investments = fixed asset investment - manufacturing investment - real estate
investment - infrastructure investment, calculated using data from January to December of 2016, manufacturing
investment in construction, real estate investment, infrastructure investment and other investment accounted for 31.5%,
17.2%, 19.9% and 31.4% respectively.
Year-on-year growth of fixed asset
investment Year-on-year growth of
infrastructure investment
Year-on-year of private fixed asset
investment
Year-on-year growth of real estate
investment Year-on-year growth of
manufacturing investment
Center for China in the World Economy 3
investment and rapid growth in infrastructure investment.
First, from the main components of fixed asset investment, the manufacturing investment accounting for
nearly one-third, its growth is expected to maintain a slow recovery trend and annually return to 6% to 7%. There
are two reasons for that, first, PPI and CPI will remain moderate growing in 2017 and lead to further improvement
of industrial enterprises’ profit, including manufacturing industry. Moreover, the manufacturing return of
investment will also be improved. In addition, the manufacturing purchasing managers’ index (PMI) in February
2017 was 51.6%, continuing to remain in the expansion range and exceeding 50% for seven consecutive months.
This data also shows that the manufacturing industry has steady signs for recovery. Second, tax cuts and other
cost-reducing measures will further benefit the manufacturing enterprises and bring a momentum for new
investment in enterprises.
Second, infrastructure investment is still the main force for steady investment and steady growth in 2017, and
it is expected to maintain a high growth rate of 18% to 20% throughout the year. Although the current fiscal
revenue growth slows down and the contradiction between fiscal revenue and expenditure is more prominent,
taking into account that the actual fiscal deficit in 2017 is likely to further expand and the current infrastructure
investment fund accounts for no more than 20% in the budget, and a lot of other funds are mainly from the local
government and corporate self-financing, bank loans and PPP project financing, the financial revenue and
expenditure problems will not form a greater constraint on the rapid growth of infrastructure investment. By the end
of 2016, the National Development and Reform Commission had introduced three batches of PPP projects with the
total size of 6.37 trillion RMB. It’s expected to be 3.8 trillion RMB settled for 2017 PPP projects, which will
strongly support the rapid growth of infrastructure investment.
Third, the investment growth in the northeastern region in 2016 appeared cliff-drop decline even by more than
30%, but the current decline has narrowed. With a series of central and local measures for northeast revitalization
introduced and promoted, some provinces’ statistics “excluding inflated figure” work completed and reference
changes, the investment growth rate in Northeast China will continue to narrow, is expected to turn positive by the
end of the year. All these actions will help the overall investment growth slowly recover.
The slow recovery in investment growth in 2017 may be subject to the following factors. First, as influenced
by new property market regulations and policies on suppression of asset bubbles, the real estate investment in 2017
will gradually slow down, and is expected to grow at around 2.5%. Second, although the current private investment
growth rate is temporarily stabilized, it’s still hovering at a low level of about 3% -4%. Private investment is still
restricted by issues, such as that the real economy gets a low rate of return and financing is difficult and high costly.
Private investment accounted for more than 60% of the total investment, its growth rate reflects the strength of
spontaneous economic growth, only the private investment in real steady recovery can boost up the real investment;
otherwise the foundation for steady investment is still relatively frail if relying on infrastructure and real estate.
Based on the above analysis, CCWE predicts that the fixed asset investment growth would be 8.6% in 2017.
2. Real estate: the growth rate goes down and continue to adjust
2016: from demand release to decline in the growth
China’s economy remained stable in 2016 as the real estate market has made important contributions.
According to the information released by the Bureau of Statistics, the annual contribution rate of real estate to
Center for China in the World Economy 4
economic growth is about 7.8%, and the contribution rate of real estate to total investment growth is 14.7%.
In 2016, commercial housing sales area reached 1,573.49 million square meters, with an increase of 22.5%
over the previous year, and a drop of 1.8% compared to the growth rate over January-November. Commercial
housing sales was 11.7727 trillion RMB, with an increase of 34.8%, but down by 2.7% in the growth rate. Such
good sales came from full demand release. From September 2014 to February 2016, the government introduced
four easing policies, including release of purchasing restrictions, downregulate of down payment proportion,
reducing interest rates and deed tax relief, which all were intended to reduce the real estate inventory.
Figure 2 sales of real estate Figure 3 prices of real estate
Source: National Bureau of Statistics, wind database Source: National Bureau of Statistics, wind database
Overall, good sales made a good achievement in reducing the inventory. However, there is a big difference in
the inventory reducing cycle of between residential and non-residential commercial building. By2December 2016,
the broad real estate inventory reducing cycle was estimated down to be 48 months based on the form of “for sale +
under construction”, reduced by 5 and 6 months respectively compared to 2015 and 2014 on a year-on-year basis,
indicating a significant achievement in de-inventory. In view of the subtypes, by December 2016 the
inventory-sales ratio of residential building was 38 months, while that ratio was 104 months for non-residential
building. Although both are at low levels compared to the same period since 2013, the difference is significant. This
means that at the real estate market the non-residential building bears much higher pressure in inventory reducing
than the residential building does.
Figure 4 Time required to resolve the inventory (Unit: month, red dotted line shows the inventory-to-sales ratios of
November over the past years.)
2 CCWE uses the broad inventory-to-sales ratio to reflect the inventory of commercial building and the time
required to reducing the inventory. The inventory-to-sales ratio of commercial building is defined as the ratio of the
inventory of commercial building over the sales in a certain period (usually a month). The formula is: the broad
inventory-to-sales ratio of commercial building = (“for sale” area + “under construction” area) / average monthly
sales area of commercial building. Where, the average monthly sales area of commercial building is the moving
average of sales area for last 3 months; the “under construction” area includes residential construction area, office
building area and commercial business construction area.
Sold area of commercial residential
building: year-on-year growth
Sales of commercial residential
building: year-on-year growth
100 cities’ housing price index (
Year-on-year growth)
100 cities’ housing price index
(month-on-month growth)
Center for China in the World Economy 5
Data source: WIND database
In 2016, the national real estate development investment reached 10.2581 trillion RMB, with a nominal
increase of 6.9% over the previous year (an actual increase of 7.5% if excluding price factors), and the growth rate
increased by 0.4% over January-November. The area of houses constructed by real estate enterprises reached
7,589.75 million square meters, up by 3.2% over the previous year, and the growth rate increased by 0.3% over
January-November. The area of new construction was 1,669.28 million square meters, with an increase of 8.1%,
and growth rate up by 0.5%. The completed area reached 1,061.28 million square meters, with an increase of 6.1%,
and growth rate down by 0.3%. In 2016, the area of land purchased by real estate enterprises reached 220.25
million square meters, down by 3.4% over the previous year, and a decrease of 0.9 % over January to November;
land transaction price was 912.9 billion RMB and went up by 19.8%, with the growth rate down by 1.6%.
Figure 5 Year-on-year cumulative real estate investment Figure 6 land acquisition and new construction area
Source: National Bureau of Statistics, wind database Source: National Bureau of Statistics, wind database
2017: to enter the down channel
We believe that the real estate market may reach its peak after the round of rally in 2016 and face a greater
downside risk in 2017 due to the following reasons:
Stringent policies are induced to suppress demand at all rounds
The strength to restrict housing purchase and loaning was unprecedented as it had affected a quarter of sales
Broad inventory-to-sales ratio for residential
building
Broad inventory-to-sales ratio for non-residential
building
Real estate investment
(year-on-year growth)
Area of purchased land (year-on-year growth)
Area of new construction for residential building
(year-on-year growth)
Area of completed construction for residential
building (year-on-year growth)
Center for China in the World Economy 6
area, more than one-third of real estate investment, and nearly half of real estate sales. During the National Day,
over 20 cities re-implemented or updated the loan restriction policy, with the purpose to curb the local
upgrading demand for two and above houses as well as the investment demand from people holding foreign
household registration. Based on our calculations, the area of real estate in purchase-restricted cities accounts
for 25% of the total sales area across the country and 36% of total investment and 48% of total sales. Since then,
some hot cities have tightened the policy and continued a second adjustment where in the industrial policy,
strictly implemented the purchase restriction policy to raise the purchase threshold.
In addition, the “house is used to live rather than to speculate” was proposed at the 2016 central economic
work conference, which is obviously different from the idea of “reducing inventory” of real estate last year. In
addition to the policies to curb demand such as “macro-custody of the currency” and “strict restrictions on credit
flowing to speculative buyers”, other policies like “increasing the land supply, increasing the proportion of
residential land, activating restricted and offset land in cities” are used to cool down the real estate market. Under
the tone of new policy “to curb asset bubbles and prevent financial risks” in 2017, the easing policy environment
for the real estate industry will no longer exists. As influenced by all-round demand compression and increment in
land supply, the real estate market is difficult to form a rally in 2017.
Mortgage leverage rises quickly
Over the past four years, the leverage by which residents purchase houses has been accelerating on the rise: in
2012 new personal purchase loans accounted for only 17% of commercial housing sales, while by the end of 2016,
this proportion had climbed to 42%, meaning that half of the payment of residents in the first three quarters of this
year came from the leverage. Therefore, the demand of residential buyers is largely influenced by the bank’s credit
policy, which further amplifies the impact of the current tight lending policy. In addition, the purchase leverage
ratio in recent years has been rising rapidly by large, which violently restrict the following leverage space. So at the
current time, the probability of to increase the leverage ratio in future is small, and it is difficult to form an effective
support for real estate sales.
Figure 7 the housing purchase leverage ratio for the first three quarters over past years
Data source: WIND database
Based on the above analysis, CCWE believes that the growth of real estate investment in 2017 will decline to about
2.5%.
3. Import and export: global trade risks increase, and exports recover a little but difficult to maintain
New personal housing loans/sales
of commercial residential building
Center for China in the World Economy 7
According to the General Administration of Customs (in US dollar), China’s total import and export in
2006 reached US $3.685591 trillion, with accumulative growth of -6.8% year on year. The total import was US
$ 1.587430 trillion, with accumulative growth of -5.5% year on year. The total export reached US $ 2.098161
trillion, with accumulative growth of -7.7%. Trade surplus amounted up to US $ 510.731 billion. Wherein,
China’s exports and imports have been declining for two consecutive years. In 2017, the preliminary results
from the General Administration of Customs showed that China’s export from January to February amounted
to US $ 302.81 billion, up by 4.0% year on year, while the import amounted to US $260.69 billion, up by 26.4%
year on year, and in February the trade was a surplus.
As shown in Figure 8 and Figure 9, the year-on-year cumulative export of 2017 turns positive due to the poor
performance in early 2016. Moreover, the export in February of 2017 declined compared to the same time of 2016.
The year-on-year cumulative growth and month-on-year cumulative growth substantially turns positive in 2017,
indicating that China’s import does improve at the beginning of 2017. In view of China’s imports and exports
falling in the early 2016 compared to previous year, we calculated the year-on-year growth of January to February
of 2017 over the same time of 2015, the export calculated is -17.90% and import is 4.67%.
Figure 8 Cumulative year-on-year import and export growth Figure 9 Month-on-year import and export growth
Data source: WIND Database Data source: WIND database
Export: small growth at the beginning of the year but there is a worry about its sustainability
By analyzing export economies, we find that although China’s exports to major economies have increased
compared to the period from January to February of 2016, it declined significantly compared to the same time of
2015, indicating that the cumulative increase in export in 2017 reflects a slight improvement, just relatively higher
than previous year, but in fact China’s export in 2017 will remain in a relatively sluggish.
Another concern is that the trade balance in February 2017 has been the first deficit since February 2014. To
this end, after comparing the export data over the years, we find that most of trade balance in February will decline.
We believe that the reason for the decline is that in January each year many companies will sign a trade contract,
resulting in the decline in February.
We believe that compared to 2016, China’s exports in 2017 will face with greater risk instead:
First, since 2012, the global trade growth rate has been lower than the economic growth rate and this situation
Export amount: year-on-year growth
Import amount: year-on-year growth
Import and export amount: year-on-year growth
Export amount: month-on-year growth
Import amount: month-on-year growth
Import and export amount: month-on-year growth
Center for China in the World Economy 8
will probably continue in 2017. The world economic growth prospects are not optimistic this year, so under the
background, the global economy will face the pressure in export.
Second, the global trade risk increases and there is a probability that the United States and the EU’s import
from China will decline significantly. The trade protectionism elicited by the new US President Trump’s Border
Adjustable Tax (BAT) policy and the squeezing effect of “Made in USA” on “Made in China” in the US market
induced by the manufacturing industry back-home policies will deteriorate China’s export to the United States. The
euro area will usher in the election this year, if a series of black swan incidents, on one hand they may lead to the
euro exchange rate collapse, on the other hand will also affect the euro zone economic recovery, which will impact
China’s export to the EU.
Table 1 Analysis of export economies
Percentage of total export Accumulative growth,
year-on-year (referred to
Jan-Feb, 2016)
Accumulative growth,
year-on-year (referred
to Jan-Feb, 2015)
Total export 100% 4.01% -17.90%
Export to US 18.34% 1.93% -14.28%
Export to EU 17.05% -0.77% -16.17%
Export to ASEAN 12.21% 0.32% -24.52%
Export to Japan 6.66% 1.88% -11.02%
Data source: wind database, CCWE calculation
Based on the above analysis, CCWE predicts that the cumulative export growth rate would be -3.5% for 2017.
Imports: profit improves and restock boosts import
Since 2017, China’s import does have a more positive performance. Further based on the latest available data
(updated only by January 1, 2017 according to import categories), we break down the imports to analyze the
reasons for the increase in imports at the beginning of the year. As shown in Table 2 all of China’s 22 imported
products are divided into three categories: industrial, consumer and other imports3. The results show that the largest
contribution to imports is industrial imports (contribution percentage, 14.10%), while the largest contribution to an
industrial import is mineral product (contribution percentage, 11.04%). Mineral product includes a very important
subcategory: fossil fuels, mineral oil and its distillation products, asphalt material and mineral wax.
The growth of industrial imports was analyzed with consideration on the industrial enterprises’ profit and PPI.
As the fixed asset investment and price indices described in the report, due to the PPI and CPI moderately rising in
2017, the profits of industrial enterprises, including manufacturing profits, have been further improved, and the PPI
prices rising is also steady passing from upstream to downstream sectors. This shows that there have been signs of
recovery for domestic industrial enterprises and manufacturing sector in the short term, which will form a
momentum for growth of industrial imports. In this context, the year-on-year cumulative growth for inventory of
3 Specific classification criteria are as follows, industrial imports: mineral products, electrical and mechanical, audio and video equipment and their
parts, accessories, base metals and their products, plastics and their products; rubber and its products, chemical industry and related industrial products,
textile raw materials and textile products, weapons, ammunition and its parts, accessories. consumer imports: jewelry, precious metals and products; imitation jewelry; coins; optical, medical and other instruments; watches and clocks; musical instruments; plant products; vehicles, aircraft, ships and
transport equipment; leather, fur and its products; saddlery and harness; travel goods, handbags; animal & vegetable oil, fat, wax; refined edible oil;
wood pulp; waste paper; papers, cardboard and their products; food; beverages, wine and vinegar; tobacco and products; works of art, collectibles and antiquities; shoes, hats, umbrella; processed feathers and their products; artificial flowers, human hair products; miscellaneous products, wood and
wood products, charcoal; softwood; knots; living animals; animal products; stones, plaster, cement, asbestos, mica and similarities; ceramic products;
glass and its products. Other imports: special traded goods and unclassified goods.
Center for China in the World Economy 9
products by China’s industrial enterprises turned positive compared to November 2016, and reached 3.20% in
December 2016. We believe that a new round of restock will continue in 2017 and contribute to the import. The last
thing that can’t be ignored is the rise in prices of bulk commodities. Although the current international oil prices
have stabilized, still it brought some bonus for the growth rate of imports compared to previous year. To sum up the
analysis, we believe that the growth rate of industrial imports is due to improved profits of industrial enterprises,
increased demand and a new round of restock.
As for the import of consumer goods, we believe that consumption growth in 2017 and its stimulating effect
on the economy will decline, so the import will not have too obvious improvement.
Table 2 Contribution rates of imports and trades
Import Category Contribution
Percentage
Category with the biggest
contribution to decline
Sub-category
percentage
Industrial
14.10%
Mineral products 11.04%
Chemical industry and its
related products 1.79%
Consumption 1.66%
Vehicles, aircraft, ships and
transport equipment 1.39%
Plant products 1.00%
Others -0.39% Special traded goods and
unclassified goods -0.39%
Source: Wind information, CCWE calculation
Based on the above analysis, CCWE predicts that the cumulative import growth rate would be -0.5% in 2017.
The final trade surplus would be US $ 445.2 billion.
4. Price indices: CPI remained stable, PPI growth weakened
In 2017, the national consumer price index rose by 2.5% in January and by 0.8% in February. For the first two
months of this year, the volatility of the CPI is mainly due to the Spring Festival holiday in January while last
Spring Festival holiday in February. By averaging the figure over the first two month of 2017, the national
consumer price level rose by 1.7% compared to the same period last year, and by 2% compared to the 2016 annual
CPI. However, the current CPI runs in a reasonable range.
It is noteworthy that the CPI has the upward driving force mainly from non-food and service prices. The food
prices in February fell by 4.3%, non-food prices rose by 2.2%, consumer goods prices fell by 0.1% and service
prices rose by 2.4%. In February of this year, the national average temperature was significantly higher than
previous years, which was conducive to fruit and vegetable growth, and the market supply was thus adequate.
Additionally, the market demand weakened after the Spring Festival holiday, fresh vegetable prices fell by 5.4%
month on month, causing the CPI down by 0.15%. Pork prices fell by 0.9%, causing the CPI down by about 0.03%.
Except food and tobacco, however, prices of health care, education, culture and entertainment, transportation and
communications and service went up year on year. Looking back to January of this year, non-food CPI increased by
0.7% month on month, the highest growth since September 2004, significantly higher than the previous Spring
Festival month. In future, prices of tourism, medical, education and communications will have an increasingly
important impact on CPI fluctuations.
Center for China in the World Economy 10
With the prices of international bulk commodities running at high levels, currently we need to guard against
imported inflation, but not worry too much as the international bulk commodities has reached a record high, rising
space is limited, such as international oil prices go flat recently, indicating domestic fuel prices will also slow down
at the following stage. According to the CPI of previous years and the average trend of the chain, CCWE predicts
that CPI would rise by 1.8% year on year in the first quarter of 2017, and the annual CPI rise by 2.1%.
Figure 10 CPI year-on-year growth rate Figure 11 PPI year-on-year growth rate
Source: National Bureau of Statistics Source: National Bureau of Statistics
In January 2017, the ex-factory prices offered by the national industrial producer rose by 6.9% year on year,
up by 0.8% month on month. By February, up by 7.8% year on year and up by 0.6% month on month. Although
PPI is high since the beginning of the year, the main driver of the upturn in the two months comes from the hikes.
The hike in January was about 6.1%, and about 6.4% in February. In view of the month-on-month data, PPI gains
goes down for two consecutive months, and its upward trend is slowing. With the hikes weakened, PPI is bound to
appear “high in the first half but low in the second half” of the year.
In detail, prices of oil and natural gas extraction, oil processing, coal mining and washing industry go up
by1.1%, 0.8% and 0.1% respectively, which together cause PPI up by about 0.05% month on month, while has a
less impact on PPI growth compared to January, down by 0.26%. In addition, prices of ferrous metal smelting and
rolling processing, non-ferrous metal smelting and rolling processing, chemical raw materials and chemical
manufacturing go up 2.3%, 2.0% and 1.9% respectively, which together cause PPI up by about 0.4 % month on
month.
Although the current international oil prices at a high level, this week there are several steep falls in oil prices.
Oil prices fell all the way this week, mainly with US crude oil inventories rose and the dollar rose. By February of
this year, the US API and EIA crude oil inventories hit a new high, which, to a certain extent, eases the international
supply and demand. Moreover, at the current moment, the OPEC member countries and non-OPEC oil-producing
countries have not yet clearly stated that the current production reduction agreement to be expired in May this year
will continue to be implemented. From the market demand, the global demand for crude oil may become weak. The
International Energy Agency (IEA) released a forecast on Monday (March 6) that US shale oil production may
continue to grow and the demand for refined oil in Europe will reduce. This trend will not help deal with the global
oversupply, and the rise in international oil prices is thus limited.
From the number of industries, the six major industries mentioned above together cause the PPI up by about
CPI: year-on-year growth
CPI: moth-on-year growth
PPI: year-on-year growth
PPI: moth-on-year growth
Center for China in the World Economy 11
6.3%, accounting for about 80% of the total gain. Of 40 industrial categories investigated, prices of products from
33 industries rise year on year, comparable to that in January while up by 1% compared to December last year. It
can be obviously seen that price increases have been extended from the upstream to the downstream industries, and
the number of rising industries is basically stable.
According to the average PPI year-on-year and month-on-month trend of previous years, CCWE predicts that
PPI would rise by 7.2% for the first quarter and rise by 6% year on year by the end of 2017.
5. Corporate profit - growth continues but gets narrowed
We believe that the rise in profits of industrial enterprises mainly benefits from the adjustment of supply and
demand. From the supply side, after 2016, the first year of “the 13th five-year plan”, the supply reform has achieved
some success as in the industrial field the “cutting overcapacity” measures ease the original imbalance between the
supply and demand, and raise prices of coal and steel, and to a large extent improve profits of the upstream
industries. On the other side, in 2016 influenced by the rapid growth of the real estate industry and the purchase
preferential policy of the automotive industry, from which related industries benefited and had a relatively good
income in 2016. In addition, in 2016 the PPI month-on-year growth turns from negative to positive, and the price
rebound is also an important factor for the growth of industrial profits.
According to the data, the manufacturing PMI index in February was 51.6%, continuing the good trend
beyond 50% since September last year. The non-manufacturing business activity index was 54.2%, although falling
back compared to the end of 2016, it still remains above 50%. The above index reflects that China’s industrial
development has continued to improve, and industrial enterprises’ profits, after a significant improvement in 2016,
still have a favorable support. The PPI in February rose by 0.6% month on month, and up by 7.8% year on year.
PPI’s continuing to rise also proves that the profits of industrial enterprises still have the conditions for the rise in
the short term.
However, in the long run, on one hand, the “cutting overcapacity” reform in the supply side has achieved a
great success, and objectively will face greater difficulties in further push; on the other hand, influenced by the
policies, the real estate market will slow down in 2017. As the purchase preferential policy is announced later and
the preferential rate not as well as last year, therefore, the car industry profits in 2017 will slow down as well. In
addition, the price of some bulk commodities has reached a high level, in the second half of 2017 the PPI trend will
also go flat, which will weaken the support for profits of industrial enterprises.
According to the above analysis, we believe that in a short term, profits of industrial enterprises will rebound,
but in a medium and long term, the profit growth rate of industrial enterprises will slow down accordingly.
6. Consumption: car sales stamina is insufficient; retail growth is not optimistic
In December 2016, the total retail sales of social consumer goods reached 3.1757 trillion RMB, up by 10.9%
year on year, of which retail sales of consumer goods above the quota amounted to 1.6945 trillion RMB, with an
increase of 9.8%. For the whole year of 2016, the total retail sales of social consumer goods reached 33.2316
trillion RMB, up by 10.4% over the previous year. Among them, the retail sales of consumer goods above the quota
amounted to 15.4286 trillion RMB, with an increase of 8.1%. Where auto consumption remained strong: in
December, auto retail sales rose by 14.4%, 2016 annual auto retail sales grew by 10.1% year on year. The car sales
Center for China in the World Economy 12
were up to 27.86 million vehicles in 2016.
However, one of the reasons why consumption did not reach a higher rate in 2016 was in that the bonus from
the second child policy was lower than expected. According to CCWE’s previous quarterly report, in 2016 the
second birth might become a driving force to stimulate consumption. According to family planning, hospital
delivery statistics and the birth population and pregnancy data from all provinces of China, the population born in
2016 would be 17.50 million, with an increase of 1 million compared to 2015, far below the previously estimated
2.50 million.
Despite the strong growth momentum in 2016, such good trend is more difficult to sustain after entering 2017.
One reason is that the steady recovery of residential consumption in 2016 mainly relied on the popularity of
car sales. In December 2016, the retail sales of social consumer goods increased more than 0.9% compared to
October, of which car sales growth rate rose by 6% over October, and in December car sales accounted for more
than 12% of the total retail sales of social consumer goods. Through calculation, it can be found that consumption
growth was mostly from the car sales. After entering 2017, despite the purchase preferential tax extending to the
end of the year, the late introduction of the new policy, and the preferential degree only half of that in 2016, there
was a very likely lead to car over-consumption in 2016, resulting in that such hot sales trend would be
unsustainable in 2017.
The other reason is that decline in the disposable income growth, to a certain extent, limits the purchasing
power of residents. For the whole year of 2016, the per capita disposable income of the national residents increased
by 6.3%, lower than the GDP growth rate for the first time for past five years. Where, the decline in rural
disposable income growth was more obvious, the gap between urban and rural areas has expanded in the trend. In
2016, China’s Gini coefficient was 0.465, going up compared with 2015, which was the first time to rise in recent
years. The decline in disposable income growth and the widening gap between urban and rural incomes will limit
the overall purchasing power of residents and adversely affect the further growth of consumption.
Figure 12 Year-on-year growth of retail sales of social consumer goods
Figure 13 Year-on-year growth of auto retail sales
Source: National Bureau of Statistics, wind database Source: National Bureau of Statistics
According to the above analysis, CCWE predicts that in 2017 total retail sales of social consumer goods
growth rate would be 10.0%.
II. China’s economic risk
Total retail sales of social consumer goods,
month on year growth
Total retail sales of social consumer goods,
year on year accumulative growth
Total retail sales of automobile,
month on year growth
Total retail sales of automobile, year
on year accumulative growth
Center for China in the World Economy 13
1. Exchange rate and capital flows: the RMB exchange rate tends to stabilize, and capital outflow pressure slows
down
Since 2017, the exchange rates of RMB against US dollar and the basket of currencies have stabilized. By
March 11, the exchange of onshore RMB against US dollar appreciated by 0.5% compared to the end of 2016, and
the offshore RMB appreciated by 1.2%. The offshore RMB was valued more than the onshore RMB, and the
exchange discount rates of both offshore and onshore RMB were down. While the exchange rate stabilizing, the
pressure on capital outflows has also slowed. Since January 2017 the foreign exchange reserves fell below US $ 3
trillion for the first time, while in February foreign exchange reserves appeared the first rebound since June last
year and returned to US $ 3 trillion and above. According to the Center of China in the World Economy (CCWE) of
Tsinghua University estimates, the broad capital outflow from January to February of 2017 was US $ 20 billion and
the outflow slowed down compared to US $ 549.2 billion in 2016 and US $ 755.5 billion4 in 2015.
Since 2017, the policies of the United States and other developed countries have uncertainty increased as the
US dollar index has fallen by about 1%, while the domestic investment, consumption, industrial enterprises profits
and a series of indicators have stabilized, which provides a better window for China to further promote the capital
market reform. When strengthening the authenticity audit of trade settlement, and careful management of the
cross-border investment and financing business of domestic enterprises, the internationalization process of the
interbank market has also been promoted. On February 27, 2007, the State Administration of Foreign Exchange
(SAFE) issued a notice to allow foreign non-central bank investors to participate in the domestic foreign exchange
derivatives market, a policy that would significantly reduce the foreign exchange hedging costs of foreign investors
and help to attract more foreign capital into the Chinese bond market.
Figure 14 Onshore offshore exchange rates of US dollar against RMB and
Figure 15 Exchange rate indices of RMB against the basket of currencies (December 31, 2014 as the base period)
Data Source: WIND Database, CCWE Estimated Data Source: CEIC Database, CCWE Estimated
The slowdown in capital outflows was mainly due to the decrease in the deficit of the current account
settlement
4 According to CCWE, the broad capital outflow=loss of foreign exchange reserve + trade surplus (including commodity
and service trade)-depreciation caused by exchange rate fluctuation.
Price difference (right axis)
US dollar against onshore RMB
US dollar against offshore RMB
Center for China in the World Economy 14
For the whole year of 2016, China’s broad capital outflow was about US $ 550 billion, compared with $ 20
billion from January to February of 2017, the net inflows appeared in February and reached about US $ 56.6 billion,
which was the first net capital inflow since December 2014. The slowdown in the rate of capital outflow was
mainly due to the narrowing of deficit in current account settlement. As shown in Figure 17, the daily settlement of
the bank on behalf of customers is broken down into current program and financial program, it can be seen that
fluctuations from the bank settlement and sales of foreign exchange under the current account go far beyond that in
capital and financial programs, and compared with last year, the depreciation of the bank settlement under the
current account in 2017 decreases significantly, from US $ 32.6 billion at the end of 2016 down to US $ 8.1 billion
in January of 2017.
Figure 16 Estimation of broad capital outflows
Figure 17 Balance of spot bank settlement and sales of foreign exchange on behalf of customers
Data source: WIND database, CCWE Estimated Data source: WIND database
The current account is further broken down into trade in goods and services. As shown in Figure 18, the
surplus of settlement and sales of trade in goods trade has increased compared with that of 2016, and both the
settlement ratio and the sales ratio of foreign exchange have steadily increased, and the gap between them is small.
In terms of trade in services, the exchange sales rate falls, while the exchange revenue rate increases, the scissors
between them is narrowing. These data indicate that trade practices and trade exchange settlement and sales are
being re-linked, and the audit on authenticity of trade exchange settlement and sales is gradually producing a good
policy effect.
Figure 18 Balance between spot exchange settlement and sales by banks on behalf of customers: trade in goods
Figure 19 Balance between spot exchange settlement and sales by banks on behalf of customers: trade in services
Estimate of capital outflow (100 million USD)
Net balance of bank’s settlement and sales of foreign
exchange on behalf of customers after adjustment of forward contract (settlement - sale of foreign exchange, 100 million
USD)
Balance of bank’s settlement and sales of foreign exchange
on behalf of customers: ordinary programs
Balance of bank’s settlement and sales of foreign exchange
on behalf of customers: capitals and financial programs.
Center for China in the World Economy 15
Data Source: WIND Database, CCWE Estimated Data Source: WIND Database, CCWE Estimated
The structure of capital outflow
According to CCWE, a capital outflow amounted to US $ 352.6 billion was hidden under the current account
in 2016, accounting for about 60% of total outflow. Specified by assets, current assets such as deposits of outflow
from capital and financial accounts contributed US $ 126.9 billion in 2016, accounting for about 22% of total
outflows. Direct investment in foreign currency contributed US $ 30.6 billion of net capital outflows, accounting
for about 5% of total outflow. US dollar securities (including bonds and stocks) contributed US $ 18.4 billion of net
capital outflows, accounting for about 3% of total outflows. Since RMB entered the depreciation range following
the reform of exchange rate in August-November, 2015, the outflow of capital has been still utilizing the trade
channel. The outflow of liquidity capital under financial programs is also a considerable part.
Figure 20 Capital outflow by BOP projects Figure 21 Capital flow structure by asset holding entity
Source: Wind database, CCWE calculation Source: People’s Bank of China, CCWE calculation
It is also worth noting that if diving the total capital outflow by holding entities, we find that the capital flows
from the household sector is much lower than the corporate sector. As shown in Figure 20, the household
Balance of bank’s settlement and sales of foreign exchange on
behalf of customers: trade in Services
Balance of receipt and payment of foreign exchange: service
Settlement-over-receipt ratio for foreign exchange: service
Sales-over-payment ratio for foreign exchange: service
Balance of bank’s settlement and sales of foreign
exchange: trade in goods
Foreign exchange settlement for trade in goods, monthly growth, in 100 million USD
Foreign exchange sales for trade in goods, monthly growth,
in 100 million USD
Trade Deposit Loan Direct investment Securities
Residential sector Enterprise Sector
Commodities Service
Ordinary programs Direct investment Securities others
Capital and financial programs
Center for China in the World Economy 16
sector-dominated capital outflow in 2016 was about US $ 90 billion, while the sector-dominated capital outflow
was about US $ 516.9 billion5, which indicates that the entity for current capital outflow is still the corporate sector,
and non-financial institutions leads the round of capital outflow in the name of import and export settlement and
foreign debt repayment in US dollars. Guan Tao (2016) believes that the domestic enterprises to accelerate foreign
debt repayment is the main channel for capital outflow. The CCWE’s calculations also support this argument. The
study shows that as depreciation of RMB is expected, enterprises accelerate the process of foreign debt repayment.
In 2016, the enterprise sector’s net repayment reached about 86 billion US dollars. In addition, many scholars
believe that part of the capital outflow from the central bank’s official reserves transfers to the household sector,
namely, “Foreign Exchange Held by the People”. However, according to the CCWE’s calculations, in 2016 the
household sector held additional 28.6 billion US dollars of deposits compared with the end of 2015, accounting for
only 6% of total capital outflow. It indicates that the vast majority of capital outflows is not converted into
household deposits, but transferred overseas through trade and investment of the enterprise sector.
Overall since 2017, as the state strengthens the audit of trade authenticity, the capital outflow significantly
reduced with the aid of trade channel, so the deficit of exchange settlement and sales under current bank account
narrows and the rate of capital outflow significantly slows down. In the context of the increasing uncertainty in
European and US policies, we still need to strengthen the guidance of liquidity capital, and closely monitor
cross-border funds and make response to the possible financial fluctuations at home and overseas in a timely
manner. On the premise of control of the corporate sector’s cross-border capital flows and reasonable guidance to
market expectations of the household sector, choose the right time to further promote the financial reform process.
2. De-leverage: the government has room for debt to orderly guide the bond default
There is room for government debt
By the end of 2016, China’s central and local government debt balance reached about 27.33 trillion RMB,
accounting for about 36.7% of 2016’s GDP, said Xiao Jie, Minister of Finance on March 7. This debt ratio is lower
than the EU’s 60% warning line, also lower than the current major market economies and emerging market
countries (Japan, 200%; the United States, more than 120%; Brazil ,100%; India, about 70%). We believe that the
Chinese government debt risk remains in the controllable range, and there is a certain debt space.
New debt shall avoid the “underground action” and implement the “sunshine project”. On one hand, to crack
down on illegal debt guarantees, and on the other hand, introduce new regulations to guide the local government’s
legal financing behavior.
In 2016, the investment in the infrastructure fixed assets reached 11.8878 trillion RMB, up by 17.4%.
Considering the momentum of a new round of infrastructure construction, Chinese government can issue
appropriate bonds on the basis of risk control to support good infrastructure projects. In addition to infrastructure
construction, we recommend local government pilot “real estate fund”, which can be sourced from local debt at the
mortgage of local government’s real estate as well as part of the income from land sales by the government. If these
5 When dividing the capital outflow by holding entities, we made the following assumptions: 1. Under the current account, the capital
outflow hidden in the goods trade is dominated by the corporate sector, while that hidden in the service trade (mainly tourism) is
dominated by the household sector; 2. The capital outflow related to securities investment, and direct investment is mainly
implemented by the corporate sector in that the as for securities investment, mainly financial institutions transfer the capital with
channels such as QDII , while direct investment is mostly related to state-owned enterprises and private enterprises; 3. Other
investment items only consider deposits and loans within the territory, including household deposits and loans, dominated by the
household sector, and non-financial enterprises deposit and lending, dominated by the corporate sector.
Center for China in the World Economy 17
debts can have real estate as collateral, interest costs will be relatively low and help reduce the government’s
financial burden.
Guide orderly default of the bond
Because of the implicit guarantee by the government and relevant agencies, some local government bonds and
trust products are expected for “rigid redemption”, which are supposed to default or reorganize, but can escape.
Moreover, these products are also committed to offer higher interest rates, so gained the favor of investors.
In fact, the high interest rate should be the risk premium to be provided in response to its larger reorganization
or default, but the current ratio of restructuring and default is far below that should occur. The entire financial
market and even regulators are reluctant to see the reorganization or default occurred. This has led investors to
blindly pursue high-return in financial products. This is essentially a question of the pricing of risk in China’s
financial markets. We should orderly guide the bond market default and restructuring, breaking the “rigid payment”
illusion, to guide the market pricing back to rational range.
The bond market is open to the outside world
In 2016, the RMB internationalization further advanced. RMB was included in the SDR basket, and the
international market demand for Chinese bonds rose accordingly. In 2016, overseas institutions issued over 600
billion RMB of “Panda debt” in the Chinese market, while more than 400 foreign investors invested in the Chinese
bond market, and the investment amounted to 800 billion RMB. Although RMB bonds are not eager to incorporate
a specific bond index, they will work toward this direction, said Governor Zhou Xiaochuan. General Secretary Xi
Jinping’s speech at the Davos World Forum also manifests that China has the ambition to hold a new banner of
globalization. In this process, it is necessary to promote the globalization of assets, within a reasonable range to
further open the domestic capital market. This can be for domestic enterprises to exploit new sources of funding for
investment, on the other hand foreign institutional investors can also strengthen the market management, and guide
rational pricing.
III. “Trump risk” still exists, and we shall be vigilant of domino black swan
In 2016, Trump was elected and the United Kingdom left the EU as the representative events indicating of the
emerge of trade protectionism and populism, the global economy is still at a low level, the trade pattern is also
facing deep adjustment. According to the recent forecast of the Organization for Economic Co-operation and
Development (OECD), in 2016 the global economic growth is expected to only 3%, together with 2015, is the
slowest growth for past five years. Looking ahead 2017, although China, the United States and the Europe have a
considerable short-term recovery resonance, and PPI and PMI pick up quickly, the slow growth of the world
economy and global environmental uncertainty will continue to be the two main themes of the international
situation.
1. The United States – “Trump risk” still exist, raising interest rates is almost forgone conclusion
According to the latest report of the US Department of Commerce, the US economic growth fell sharply in the
fourth quarter of 2016, and the growth rate was only 1.9%, significantly lower than 3.5% in the third quarter. From
the whole year, US economic growth rate was only 1.6% in 2016, hitting a lowest level for past five years.
Center for China in the World Economy 18
Although the US economic recovery in 2017 is still uncertain, the employment and manufacturing industry have
good performance. The US Department of Labor released the latest data on Friday, showing that in February the
United States non-agricultural employment increased 235,000 people, once again exceeding expectations. The
unemployment rate, compared to the previous value, decreased by 0.1%, labor participation rate rising by 0.1%.
The average hourly wages rose by 2.8% year on year and was in line with expectations. In view of sectors,
employment in construction industry, private education services, manufacturing, medical services and extractive
industries went strong. As shown in Figure 22, the number of initial jobless claims in the United States continues to
decline, indicating stronger health of the labor market. Meanwhile the US unemployment rate is also low, below 5%
unemployment indicates that the US job market is at or near full employment. Figure 23 shows that the US
manufacturing PMI has been more than 50 since September 2016 and is on the upswing; the year-on-year growth of
US gross industrial output by final product has been positive since August 2016. This shows that the US
manufacturing industry is in a slow recovery trend.
Figure 22 US unemployment rate and US initial jobless claims (person)
Figure 23 Year-on-year growth of US manufacturing PMI and US industrial output value by final product
Data source: wind Database Data source: wind database
In 2016 the US economic performance and recent economic data will largely strengthen the new President
Trump’s “American Priority” policy and strive to achieve the economic goal of “US’s 5% of nominal GDP growth”.
Although since Trump has come to power, the major policy shifts that he wants to achieve has not yet been
implemented, it does not mean that the “Trump risk” has weakened, and China needs to be highly concerned about
the relevant US economic policies and prepare for risk. We believe that the following aspects need to be addressed:
First, trade protectionism. Trump summarizes the trade advocacy concisely as “buy American goods, and hire
the Americans”. At present, the United States has withdrawn TPP. The Border Adjustment Tax (BAT) policy that
China is most concerned with has not yet been implemented. If BAT to be implemented, considering the high
proportion of China’s exports to the United States, China’s exports may be further deteriorated.
Second, to adjust the tax levy and strengthen the local manufacturing industry. From the end of 2016 and early
2017 data, the US manufacturing industry slowly recovers in the short term. To accelerate the return of the
manufacturing sector, Trump has advocated (1) for the US company that have overseas subsidiaries, to charge
one-off tax of 10% of the cumulative profits withdrawn; (2) to reduce the corporate tax from currently 35% to 15%.
If these policies are to be implemented, the import substitution of the US domestic market will increase, and will
also have an impact on China’s exports. It is reported that the new government tax reform program will be
Unemployment rate in US
Number of persons applying for
unemployment compensation for
the first time
Manufacturing PMI
Gross Industrial Output
Value-Final product, year-on-year growth
Center for China in the World Economy 19
submitted to the Congress in mid-to-late March.
Third, to raise interest rates in 2017. With the beautiful performance in employment and inflation data, the
Federal Reserve is likely to accelerate the process of raising interest rates. Yale and other Fed officials in early
March have introduced multi-round forward-looking guidelines been on the market. According to the Bloomberg
rate market check, the Federal Reserve in March will 100% raise interest rates, and so do in June. Based on the
CME “Federal Reserve Watch”, the Federal Reserve hikes the rate in March with a probability of 90.8%, and in
June interest rate of 95.9%. The Federal Reserve’s rising interest rate will lead to a stronger dollar, and that the
global liquidity is facing marginal contraction, the pressure of devaluation of RMB and capital outflows may be
enhanced.
Fourth, to strengthen the infrastructure construction. Trump said in a recent congressional speech that the new
government has proposed a US $ 1 trillion in infrastructure spending, which was nearly double than previously
projected US $ 550 billion. Infrastructure spending in the short term will drive aggregate demand in the United
States, playing a supporting role in economic recovery. In the long term, it will help to reshape the productivity and
competitiveness of the United States, in cooperation with Trump manufacturing industry policy proposition.
2. Europe – the economic recovery and differentiation co-exists, be vigilance of domino black swan
Recently, the economic growth in the euro zone, employment and PMI have a more positive performance. In
2016 the economic growth rate reached 1.8% in the euro zone, 1.6% more than the United States. In addition, PMI
reached 54.4 in the euro area in January 2017. With the overall economy showing signs of recovery, the
differentiation within the euro area is worthy of attention. In particular, it is important to note that the high
non-performing loan rate of banks such as Italy may become a risk event again in 2017.
Compared with the economic performance, the biggest risk in the Europe may come from political uncertainty
in 2017. The Netherlands, France, Germany, Italy and Belgium will usher in the election of the highest political
leaders, and the British will officially launch to leave the Europe. The European politics is likely to have domino
black swan incident. The current populism is growing rapidly in various countries: in the Netherlands, the Dutch
right-wing Freedom Party (PVV) leader, Wilders, to join the election on March 15, advocates anti-Muslim,
anti-immigrant, and anti-EU. In France, holding the “French priority” flag, the “French woman Trump”, Le Pen, is
likely to win in the election. In Germany, the member of right-wing populist party “Alternative for Germany”
(AFD), Petri is called “German woman Trump”, whose policy advocates against the euro and further European
integration, and to stop accepting refugees. Even the current Prime Minister Angela Merkel and her party are also
facing the pressure of public opinion and election and the policy advocates begin to have a tendency to reverse. If
these populist parties win in the forthcoming general election, it is likely that the result is that the Netherlands,
following the United Kingdom, will leave the Europe. The process of European integration has been hit hard, the
euro ushered in the crash, and the European economy would fall into a continuous sluggish.
Expert column
******************************************************************************************
Li Daokui: to create conditions, and strive to make the year 2017 as a turn point for China’s economy
rebound in the bottom via this adjustment
China’s economy has been declining for six consecutive years. By 2016, the growth rate should have fallen
Center for China in the World Economy 20
below the long-term growth potential of China’s economy. In other words, the current China’s economy runs at a
speed lower than the designed one. After several adjustments over the past few years, China’s economy in 2016
already have some important conditions to turn up in the bottom:
First, the problem of overcapacity begins to resolve, and the upstream industry prices begin to rise;
Second, after three consecutive years of decline in growth, foreign trade may be close to bottoming out;
Third, with the supply side structural adjustment gradually in place, a lot of industrial capacities, and profits
begin to recover, which is conducive to driving the relevant investment.
However, the above three important conditions can’t fully be sure that the China’s economy has begun to
bottom out. To make China’s economic growth in 2017 bottom out, and gradually build up the U-shaped bottom by
this round of economic structure adjustment, the following three things are still very important:
First, try to make the reform further implemented, especially through the reform to stimulate the original
driving force of economic growth, and resolutely continue to promote and complete the hard task to cut
overcapacity and make zombie enterprises quit. In 2017, we should especially strive to reduce the cost of business.
Therefore, the enthusiasm of local enterprises, especially private enterprises, should be promoted by mobilizing the
enthusiasm of local governments to promote growth. Particularly, it is recommended to build up the appropriate
fiscal decentralization, leave more fiscal revenue to local governments and make them have more capacity to
discharge or cut tax for private enterprises. In addition, it must cut overcapacity and quit zombie enterprises, which
is the necessary condition to ensure that this round of economic restructuring bottoms out. It must resolutely and
continually quit backward overcapacity enterprises, to make room for advanced production capacity as well as for
industrial upgrading.
Second, cool down the “high-fever” in the financial field. At present, many investors mistakenly believe that
some of the long-term construction, “rigid redemption” bonds are high-quality assets, their risk awareness is thus
imperceptibly reduced, also the market ROI is raised. Therefore, a lot of capital in the financial sector chase after
high-risk, low-return financial products, making the real economy, profitable, low-risk, low ROI not gain
investment. The “high fever” shall thus be cool down and under the control of the conditions and with intentions to
make some financial products reorganize and bankrupt, allowing the financial industry to re-establish risk
awareness and risk premium, also forcing the money into the real economy.
Third, reasonably address the impact of various risk factors from the outside, especially from the United States.
After President Trump took office, investors should not have unrealistic illusions about the US economy. In March
2017 to raise interest rates goes into a foregone conclusion, is likely to lead to pressure rising again in capital
outflows and the excessive depreciation of RMB. We must take a positive and pragmatic approach to handle the
pressure in capital outflows and devaluation of RMB in a way not arouse his suspicions, not loud noise and low-key
and secure.
If these three things can be adjusted properly in 2017, the bottom of the growth of the China’s economy in this
round of adjustment is likely to be formed in 2017. And after 2018 and 2019, China’s economic growth is more
likely to get a steady recovery.
Center for China in the World Economy 21
Yuan Gangming: China’s economy can get steady in the slowdown only turn from virtual to real economy.
The 2017 government work report announces that the GDP growth target would be around 6.5%, making it
better for the actual. China’s economic growth target has dropped by 0.5% over the previous year. Between 2013
and 2017, the growth target falls from 7.5% to 7%, 6.5% -7%, and finally to 6.5%. The real growth is lower than
the target, from 7.7% to 7.4%, 6.9% and 6.7% from 2013 to 2016. The actual growth in 2017 is likely to fall below
6.5%. The actual economic growth over the years has not shown a stabilization in the slowdown described in the
government work report. 2016’s actual growth rate declined less than the previous two years, but did not form a
narrowing trend, not even form a trend of stabilization in the slowdown. China’s economic growth has dropped
significantly below 10% since 2011, gradually far from about 10% high-speed growth miracle made in the past 10
years. This is neither our active choice, nor our ideal goal. Some people say that current low growth is better than
the fast growth in previous years as it’s more reasonable in the structure, and higher-efficiency. However, there is
no evidence to prove this argument. Now the economic growth goes down year after year, and the residents’
disposable income, business income and government revenue falls sharply in the growth, even below the GDP
growth, resulting in irrational structural increase, as well as a variety of new contradictions that continue deepen.
China’s economy slows down again and again, which can’t but say to be an unavoidable adverse change. In this
regard, we must face difficulties and pay attention to avoid making mistakes. The government work report correctly
put forward steady progress to make actual growth better and higher than the growth target.
The government work report directly pointed out the problem that the economic downward pressure was still
increasing, that was to say, the trend in slowdown of the economic growth was still going. From the actual situation,
in the past few years, China’s economic growth did not stabilize, or even formed a stable-to-better trend. The
government report mentioned that there are stable growth forces in the economy, such as consumption-driven
growth, increase in the proportion of service industries, upgrading of traditional industries, rapid growth of new
industries and enhancement of innovation and development of new industries. However, these steady growth forces
can’t resist more powerful and growing economic downward pressure, resulting in that the actual economic growth
continues to slow down. Since 2013, the economic growth target has been turned down year after year, and after
that drawback, the growth target has touched the bottom line lower than ever. However, the bottom line is still
falling. where is the problem?
The government work report pointed out that the current growth of China’s economic growth is insufficient. In
2016 the growth rate of private investment and manufacturing investment with the strongest endogenous driving
force fell sharply. The private investment growth fell from over 20% in 2014, over 10% in 2015 to 3.2% in 2016.
The manufacturing investment growth fell from over 18% in 2013, over 8% in 2015 to 4.2% in 2016. In the second
half of 2016, the monthly growth rate of private investment and manufacturing investment rebounded slightly from
2% in the middle year, still far below the normal level, without a sign of strong recovery. Affected by the market,
policy and resource allocation, private enterprises hesitated to make investment expansion and lacked of vitality
and even bankrupted. This phenomenon exposed deep issue of economic slowdown due to lack of endogenous
power. Over the years the overall profitability of private enterprises was better than state-owned enterprises. In the
first half of 2016, private enterprises’ profit grew by 8.8%, significantly higher than the state-owned enterprises’
profit growth of -8%. Private enterprises decrease the investment under higher profitability not because of their lack
of investment expansion desire, but rather because of the financing difficulties, policy discrimination and other
adverse changes to suppress their investment activities. However, since the second half of 2016 private enterprises’
profitability has been declining. By the end of the year their profit growth rate was lower than the state-owned
enterprises. Private enterprises, used to have the strongest market vitality and being the fastest growing sector,
Center for China in the World Economy 22
declined sharply in their investment from the first half of this year, and suffered deteriorating business conditions in
the second half. It painfully presents a critical situation that China’s economic downturn pressure tends to expand.
Enterprise manufacturing investment has been squeezed by the government large-scale infrastructure
investment. Since 2013, infrastructure investment has accelerated to expand by more than 20% in the first half of
2016. The manufacturing investment in the same period has changed negatively, from over 25% in past years down
to less than 10% and even to 5%. The government-led large-scale infrastructure investment expansion tried to
vigorously play a stable and push up the role of economic growth. However, the infrastructure investment
expansion was too large and took too much investment and financing resources, so that business-oriented
manufacturing investment couldn’t be smooth in the expansion. Infrastructure investment expansion exceeded a
reasonable limit as the proportion of infrastructure investment, low in investment efficiency, with long-period and
slow return, rose too fast, which resulted in poor economic operation, slow capital turnover, and being obstacles
against structural adjustment transformation and upgrading. Manufacturing investment and its growth changed
from high-speed development into low-speed crawling, resulting in the overall economy was towed down.
The real economy of manufacturing industry is frustrated but the real estate asset bubble expanded crazily.
Since 2013, China’s economy has faced an overall downward pressure as the GDP growth continues to decline and,
manufacturing and other real economic difficulties aggravated, while the real estate market soared and housing
sales and prices rose sharply. In April 2016 the real estate market reached the peak, commercial housing sales and
first-tier cities housing prices rose as high as 54.1% and 31.5% respectively. Many people cheered this soaring as
the “sunny spring” of China’s economy, and a powerful force to support the Chinese economy to rebound. All the
real estate-related activities were increasingly rising with windfall profits into profits, including steel, coal and
cement to appear higher forward prices. PPI and related business profits changed from a substantial decline into a
substantial increase. The local land transfer revenue also created another peak. The GDP growth maintained 6.7%
for three successive quarters that didn’t happen in recent years. In the last quarter, the GDP rose slightly to 6.8%.
House prices rose far more than all industries and investment, saved the real estate investment speculation and local
financial crisis, making real estate investment speculation more excited, but just a “quench thirst” for China’s
economy. China’s economy slipped from “real” into “virtual” and turned into the dangerous road of virtual
economy expanding while real economy declining”. A large amount of bank loans and social capital flooded into a
real estate to promote real estate prices soaring. The real estate industry has become more and more bubble and
speculated. The current huge growth of real estate asset value and earnings is mainly due to unrealistic push-up by
the bank mortgage funds and market speculation funds. According to the National Bureau of Statistics data, in 2016,
the added value of the real estate industry increased by 8.6%, and the added value of enterprises of coal, iron ore
and iron and steel industry, which were closely related to real estate, increased by -1.5%, - 2.6% and 1.7%
respectively. The industries closely related to the real estate happened to surplus and overcapacity and continued
decline in physical output for many years as the actual growth rate was negative, which are the main factors to drag
down China’s economic growth. This round of housing prices rose sharply, and closely-related industrial earnings
soared to stimulate excess capacity, which would deepen the future negative growth and bring greater downturn
pressure for China’s economy. Real estate used a large amount of bank loans and social funds to push their own
prices, with the vicious growth of high profit, which ruthlessly blew the real economy. In 2016, the proportion of
real estate loans and real estate loans increased to 44.8% and 25%, up by 14% and 3% compared to the previous
year. Of all real estate loans, new personal purchase loans and personal purchase loans balance accounted for 87.5%
and 71.7%, up by 13% and 4% over the previous year. The proportion of bank loans flowing to real estate rapidly
rose, and social funds were more ferocious. A large amount of bank loans and social financing flooded to real estate,
not as the central bank official saying that bank loans flowed into relevant industries through real estate, driving a
Center for China in the World Economy 23
broader industrial and overall economic growth, but rather a flood of bank loans boosted house prices, and then real
estate related industries and activities through rising housing prices to obtain monetary income and book wealth in
violent growth. Physical and real economy had essentially no substantial growth or even shrinkage. I investigated a
small enterprise producing household doors and windows accessories in Beijing, and found that its product market
sales started to seriously reduce due to the decline in real estate construction. The operating costs increased
significantly increased due to rising house prices rents and wages. The entrepreneurs worried to survive even with
the advantages of technology for products manufacturing and sighed to escape from the manufacturing industry
into the more profitable real estate industry. The National Bureau of Statistics announced that in 2016 the real estate
industry used 14.4 trillion RMB, up by15.2% over the previous year. 70 large and medium cities housing prices
went up by 10.5% and first-tier cities rose by 27.1%. The added value of real estate actually increased by 8.6%.
Housing construction area, new construction area, completed area increased by 3.2%, 8.1%, and 6.1% respectively.
Real estate sales growth was higher than the real estate sales area growth. The nominal price of real estate was
higher than its actual growth of added-up value. Use of monetary loan and social financial capital in the real estate
industry rose higher than the actual growth of it. New funds used in the real estate accounted for 44.8%, much
higher than the actual value added value of real estate, which accounted for 8%. The growth rate of real estate
investment and construction activities was lower than most of the real manufacturing industries. The actual
contribution of real estate to the economy was far less than its occupation of the capital resources. Real estate
speculation activities relied on excessive funds to blow a large bubble and relied on gold medal game to seize the
wealth, and swept away private enterprises, manufacturing industry, and livelihood, resulting in that the real
economy lack of blood as not able to develop, and a fatal threat to the future growth of China’s economy.
The central economic work stressed that “the house is used to live, not to speculate”, firmly opposing to
speculation in the real estate. It put forward to strictly limit the flow of funds to invest speculative buyers, and use
financial, land, finance and other means to curb the real estate bubble, and to promote the smooth development of
the real estate market. However, the measures to curb real estate speculation real were carried out slowly. The
property tax could sharp thorn real estate speculators; however, it was vaguely replaced as legislation was dragged
on and on and not proposed at the National People’s Congress. Relevant departments said that bank loans would
continue to invest more in real estate and make real estate speculation more rampant, while the real economy more
weak. Finally it would form a greater threat to the China’s economy. China’s economy must keep sober-minded and
draw a lesson from a bitter experience. Only bitter medicine treatment, reluctantly quitting drug addiction, and
turning from the virtual to the real economy to suppress speculation in real estate speculation as well as to revitalize
the manufacturing industry can create a new situation with stabilization in slowdown and steady progress.
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