Economic studies
China

China

Population 1, 390.1 billion
GDP per capita 8,643 US$
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 6.7 6.9 6.6 6.2
Inflation (yearly average, %) 2.1 1.6 2.3 2.5
Budget balance (% GDP) -3.0 -3.7 -3.7 -4.0
Current account balance (% GDP) 1.7 1.3 0.8 0.3
Public debt (% GDP) 44.3 47.0 50.0 54.0

 

(e): Estimate. (f): Forecast.

STRENGTHS

 

  • Sovereign risk contained as public debt remains mainly domestic and denominated in local currency
  • Reduced risk of external over-indebtedness thanks to the high level of foreign exchange reserves
  • Gradual move up global value-chains as part of China 2025
  • Dynamic services sector, led by e-commerce trends
  • Good level of infrastructure

WEAKNESSES

  • High corporate indebtedness to impact growth potential
  • Current account surplus expected to narrow and eventually turn into deficit
  • Exposure of banks to rising corporate debt levels
  • Government strategy is ambiguous on arbitrating between reform and growth
  • Ageing population; gradual depletion of cheap labour pool
  • Environmental issues
  • Weight of SOEs in the economy

Risk assessment

Gradual deceleration in 2019

China’s economic growth is set to slow to around 6.5% in 2018. This moderation will likely continue into 2019. This weaker activity has been brought about by policies aimed at curbing both financial vulnerabilities and asset bubble risks. Corporate indebtedness remains the main risk in the Chinese economy. Adding to these headwinds, an escalation of trade tensions between the United States and China is expected to start to affect growth in 2019. Tariffs on USD 250 billion worth of Chinese exports were implemented in 2018, and it is possible that more will come in 2019. Moreover, the effects of a cooling property sector are expected to impact the real economy in 2019. Household consumption, which accounts for two-thirds of GDP, has remained on target, supported by relatively low inflation and rising wages. Signs are less positive on the private investment front, as it is set to slow as a result of lower business sentiment and lower earnings – however, this decline will be offset by higher public spending. Fiscal policy will turn expansionary in 2019 to buffer the economy from external risks. The People’s Bank of China (PBOC) maintains a “prudent” stance. Monetary policy will arbitrate between accommodation and tightening in 2019, with the goal to manage the gradual slowdown and trade war impact.

Current account surplus to deteriorate

Exports in CNY terms increased by 7.9% year-on-year in the first nine months of 2018, compared to an expansion of 10.8% year-on-year in 2017. This is consistent with a softening in global trade. Slower external demand is set to continue in 2019. US tariffs will likely add to existing pressures. For these reasons, exports will likely expand at a slower rate going forwards. Although the yuan’s significant depreciation in 2018 helped to improve China’s terms of trade, it also led to a decline in foreign exchange reserves. Policymakers will likely intervene in forex markets to avoid overshooting depreciation expectations, as these could trigger outflows once again; even if capital controls remain firmly in place. While the current account returned to a surplus in the second quarter of 2018, lower export and faster import growth will likely result in a narrowing of China’s current account, which shall nevertheless remain in surplus. FDI increased, but will likely decline once headwinds to growth begin to blow.

Overall indebtedness in the Chinese economy remains extremely elevated (more than 260% of GDP). Most of the debt is owed by corporations, a large proportion of which are State-Owned Enterprises (SOEs). Many of these are “zombie” enterprises: those that are struggling with high levels of debt and overcapacity, but are kept afloat because they generate employment and output. In addition, corporate debt is difficult to assess due to the expansion of shadow banking. Moody’s estimates that shadow banking assets peaked at 87% of GDP in 2016, although they fell to 73% at the end of June 2018. The figure could be higher when taking into account other types of financial intermediation by banks, including Wealth Management Products (WMPs). The government has been trying to curb this type of lending, leading to overall higher levels of loans on bank’s balance sheets. This is positive from a macro-prudential standpoint. However, curbing shadow banking activities has had a negative impact on the financial conditions of SMEs. Finally, public debt may be higher than reported if the surge in local government financing through local government financing vehicles (LGFVs) is factored into the calculation.

Entering unchartered territory

During the 19th National Congress of the Communist Party of China (CPC) in October 2017, all members of the Politburo Standing Committee – excluding President Xi Jinping and the Premier Li Keqiang – retired. The new line-up includes Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji and Han Zheng. Xi Jinping did not announce a successor – he instead abolished presidential limits, paving the way for an extended tenure, and consolidating even more power under a series of executive bodies directly under his supervision. “Xi Jinping Thought”, a political theory, was also written into the constitution, setting a clear departure from previous party consensus, which favored decentralisation of power. On the foreign policy front, fears of a fully-fledged US-China trade war have materialised. This is expected to have an impact equivalent to at least 0.5% of GDP, although this could be as much as 1% if the United States forges ahead with 25% tariffs on all Chinese imports. External threats are sizeable enough to justify an appropriate policy response. This raises questions as to what direction policy will take following the annual plenary sessions of the People’s Congress and the Chinese People’s Political Consultative Conference in March 2019.

 

Last update : February 2019

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