China’s economic strategy for 2017 will soon be put to the test as Beijing vows to steer the economy away from property boom led growth, while promoting greater reforms in the state-owned sector.
The successful execution of the revised tactics is critical for China, which is expected to select its new leadership late next year.
The three-day mid-December Central Economic Work Conference, headed by Chinese President Xi Jinping, promised to liberalize investment in state-owned sectors, control real estate speculation and improve the “flexibility” of the yuan’s exchange rate, as the country’s economy shows signs of stabilization amid lurking challenges in the financial sector.
Beijing is stepping up efforts to “prevent asset bubbles,” deepen “supply-side structural reform” and maintain a “prudent and neutral” monetary policy.
Senior leaders have stepped back from their previous emphasis on hitting growth targets in an attempt to avoid taking on the high-risk, high reward route of aggressive stimulus policies.
While requesting attending officials to “seek progress while maintaining stability,” the policy-setting conference stopped short of repeating the phrase of “keeping economic operation in a proper range” from last year, signalling that Chinese leaders are looking to address uneven development across the economy in the coming year.
Policy advisers say this signals that growth will slow slightly in 2017, as Beijing struggles to strike a balance between supporting the economy with loose credit conditions and preventing a destabilizing build-up in debt.
That means the interest rate easing cycle that began in November 2014 and saw six cuts by October 2015 is probably over, they say, particularly as investors are drawn to higher US interest rates and move money out of emerging markets including China.
China’s economic growth is likely to be around 6.5% next year, several sources said, the minimum needed until 2020 to meet goals of doubling GDP and per capita income from 2010 levels. This year’s target is growth of 6.5% to 7%.
The challenge is how to tighten credit to contain debt, speculative investment and outflows without triggering defaults and company failures, say the advisers.
The People’s Bank of China (PBOC), which has been guiding money market rates steadily higher, is unlikely to raise benchmark interest rates before consumer inflation reaches 3%, even though rising US rates will narrow China’s yield differential, the advisers said.
Consumer inflation quickened to an annual 2.3% in November and producer prices jumped 3.3% from a year earlier, easing deflation concerns after factory-gate prices had fallen for five years.
The yuan has fallen to 8-1/2-year lows this year and is not far from weakening through 7 per dollar, even as authorities have run down reserves by around US$280 billion so far in 2016 to support the currency.
It is expected to remain under pressure next year, given the outlook for interest rate increases by the US Federal Reserve.
That means the PBOC will remain reluctant to cut bank reserve requirement ratios, given that such a move could exacerbate pressures on the yuan, they said.
And with monetary options limited, the advisers said leaders may look to running a fiscal deficit of 3% or higher to support the economy, similar to this year’s target.
The economy is on track to grow around 6.7% this year, the slowest in 26 years.
The economic growth target for 2017 won’t be announced until early March next year, when they hold the annual parliament meeting.