Economic Analysis
China

China

Population 1 373,490 billion
GDP per capita 8 141 US$
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Synthesis

Major macro economic indicatorS

  2014 2015  2016 (f) 2017 (f)
GDP growth (%) 7.3 6.9 6.7 6.5
Inflation (yearly average) (%) 2.0 1.4 2.1 2.3
Budget balance* (% GDP) -0.9 -2.7 -3.0 -3.3
Current account balance (% GDP) 2.6 3.0 2.4 1.6
Public debt (% GDP) 39.8 42.9 46.3 49.9

*Including central and local debt (excl. financing vehicles)
 (f): forecast 

STRENGTHS

  • Reduced risk of external overindebtedness thanks to the high level of foreign exchange reserves and to the maintenance of a current account surplus
  • Sovereign risk contained: public debt mainly domestic and denominated in local currency
  • Gradual move upmarket
  • Development of services
  • Development of infrastructure

WEAKNESSES

  • High volatility in the strong market
  • Social tensions linked to rising inequality
  • The share of consumption in GDP remains weak: rebalancing of the Chinese growth model remains an challenge in the medium-term
  • Ageing of the population and gradual drying up of the abundant and cheap labour pool
  • Overcapacity in certain industrial sectors and high corporate indebtedness 
  • Fragile Chinese banks (rapid increase in credit and deterioration in asset quality)
  • Government’s strategy is ambiguous on arbitrating between reform and growthØ Environmental problems

Risk assessment

The Chinese economy is expected to continue to decline in 2017.

There was a slight downturn in business in China in 2016 and this trend is expected to continue in 2017. Reforms aimed at rebalancing growth to benefit consumption and services should continue but the authorities must remain vigilant in supporting the activity in order to avoid a brutal adjustment of the economy. The monetary policy should remain accommodating. Fiscal stimulus measures would also support investment in infrastructure. Nevertheless, the profits of fragile companies will remain under pressure and private investment will remain limited in 2017. Indeed, given that companies are heavily indebted and many sectors are at overcapacity, the monetary and fiscal stimulus has proved ineffective. In this context, disposable income is expected to grow at a slower rate and the growth of household consumption will be somewhat curbed. Despite the very rapid expansion in online sales, retail sales are losing momentum since 2015.
In 2016, construction-related sectors benefited from the rebound in property prices, particularly in major cities. By 2017, prudential measures put in place by many cities to limit price increases could restrict investment and hamper the sector. However, a collapse in the housing market is however not very likely, as the authorities have the capacity to act in the event of a severe shock. The growth of the services sector, in particular financial, is also continuing.
Finally, exports are expected to continue to suffer from sluggish global demand. Nevertheless, the downward pressure on the yuan could increase the country's price competitiveness.

 

The credit risk of companies is increasing

Although the level of public debt is sustainable, that of local municipalities is high (at around a third of GDP) and remains opaque.
In addition, there are companies with very high debt levels and which, due to the expansion of shadow banking, are very difficult to assess. By March 2016, private sector debt would have accounted for nearly 210% of GDP. On top of this and despite the easing of monetary policy, the problems being faced by SMEs in accessing finance have pushed them in many cases to make use of shadow banking, and its exorbitant rates,
In this context there has been a gradual decline in the quality of banking assets which are also underestimated because of the scale of shadow banking. The ratio of non-performing loans reached 1.8% in the third quarter 2016, its highest level since 2009. Increased by "special loans", this ratio reached 5.9%. Credit risk has increased significantly, highlighted by the growing number of defaults on the Chinese bond market. While the country experienced its first default in 2014, 24 companies (including one third of state-owned companies) defaulted in the bond market in the first quarter of 2016. The introduction of a real risk of insolvency is inevitable and will help reduce the moral hazard created by government interventions. The solvency of companies in precarious situations, in the context of the economic downturn, will need to be monitored in 2016.
The foreign exchange market has seen high levels of volatility since mid-2015. The downward pressure on the yuan against the dollar is expected to continue in 2017 due to capital outflows. Foreign exchange reserves are expected to continue to decline. Nevertheless, they will remain very high (over 18 months of imports) and the authorities should continue to implement measures to control capital outflows, such as increased supervision of cross-border mergers and acquisitions.

 

The business climate continues to suffer shortcomings

Although continuity was the watchword for the transition from the previous government, President Xi Jinping has an unprecedented level of power within the Chinese Communist Party (CCP), enabling in particular his anti-corruption campaign which includes the very highest office holders in the party. The 19th Congress of the CCP, to be held at the end of 2017, should renew the President's term for another five years. The Xi Jinping – Li Keqiang duo is however facing both social and ethnic challenges. The country is marked by growing labour unrest.
Whilst reaffirming the supremacy of the CCP, the Central Committee session of the CPC in October 2014 ended with decisions relating to improvements to the rule of law. In addition, the 5th plenary session of the Communist Party, which was held in October 2015, ended the one child policy and reaffirmed the desire on the part of the authorities to develop the social protection system. Finally, there are continuing serious failings in terms of governance in particular in terms of accessing the balance sheets of companies and above all the legal protection of creditors.

 

Last update : January 2017

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