China confirms structural reforms, growth target

The new lower growth target of about 6.5 per cent will require fiscal policy support, while lower targets for monetary supply and total social financing growth confirm a tightening bias.

" The new lower growth target of about 6.5 per cent will require fiscal policy support."
Raymond Yeung, Chief Economist, Greater China, ANZ

Speaking at at China’s National People’s Congress, Premier Li Keqiang reiterated the need to stabilise China’s economy while deepening “supply-side structural reforms”.

Further efforts will be placed on executing capacity reduction, deleveraging, reducing property inventory, lowering the cost of doing business and remedying weakness in certain segments.

Although the growth target is lower than the 6.5 per cent to 7 per cent set for last year, the achievement still requires policy support.  Real gross domestic product growth of 6.5 per cent and an inflation rate of 3 per cent will likely translate into a nominal expansion of close to seven trillion renminbi in 2017.

Our current forecast is GDP will grow between 6.6 per cent and 6.7 per cent in the first half of the year, before a softening to 6.4 per cent in the second half.

As ANZ chief economist Richard Yetsenga told Bloomberg, the big questions remain around systemic risk.

“How [does] the shift from a debt-focused model to an equity focussed financing model [work]?” he said.

“Of course, the dynamics of the economy kind of determine how binding those constraints are. While growth is bouncing - and doing relatively well as it has been - those constraints are less worrying. “

The real concerns about China’s structural issues will come to the fore in the second half, Yetsenga said.

“I suspect through the middle part and the later part of this year, China will start to slow because liquidity is being tightened. And when you tighten in an economy with lots of leverage, growth will slow."

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A BIT TIGHTER

The People’s Bank of China is also likely to be cautious in its liquidity support and the pressure on interest rates is tilted to the upside in 2017.

While little was explicitly said about financial regulation reform, Premier Li emphasised a few potential financial risks, including non-performing assets, bond defaults, shadow banking and internet financing.

This suggests regulations on the above mentioned financial activities will be further strengthened in our view.

China also set a 3 per cent (as a percentage of GDP) fiscal deficit target for 2017 - the same as 2016 - suggesting fiscal policy remains proactive.

Fiscal spending on infrastructure is also likely to be on the rise, but unlikely to be on the same scale as during the global financial crisis.

DEEPER REFORMS

Premier Li said capacity reductions will continue in the steel and coal sectors, although he did not mention if the cuts would extend to other sectors. He said China would further loosen restrictions on foreign companies entering the services, manufacturing and coal mining sectors.

He said China will support foreign companies to go public and issue bonds in China, against the backdrop of further developing China’s onshore equity and bond markets.

China will aim to accelerate regional free-trade negotiations, which is likely to respond to concerns about the impact of adverse events, such as a potential Sino-US trade war.

Property market policy is likely to diverge across cities in 2017. According to Li, in cities which suffer from high inventories policy will remain supportive of residential property purchases.

For cities experiencing high house prices land supply will need to be increased. At the same time, the housing projects of “social-security houses” and replacement of shanty houses will continue.

Raymond Yeung is Chief Economist, Greater China at ANZ