Stay on target

Will 2017 be a tough year for China?


Challenges ahead for Xiao Jie?

It is that time of the year when crystal balls are dusted off as pundits try to gain some measure of the year ahead. For the Chinese an ancient form of fortune telling involves feeling the structure and shape of a person’s bones. More unusually in terms of predictive technique, a video clip went viral recently showing an enterprising gentleman ascertaining a young woman’s fortunes by putting his hand down her dress and fondling her breasts. “I can do that too,” one netizen reflected. “D-cup will certainly have better luck than A-cup.”

Breasts and crystal balls are probably as effective a predictive tool as any in a year in which Brexit and Trump have made the forecasting profession look stupid. But over the past week or so, economists have begun chancing their credentials for 2o17. China’s domestic media has also been poring over ministerial statements to second-guess the agenda at the government’s annual, closed-door Central Economic Work Conference (typically held in mid-December).

In particular, the commentators are focused on next year’s GDP target. China’s leaders have said they want to maintain 6.5% to 6.7% growth to meet the longer-term aim of doubling GDP and disposable incomes between 2010 and 2020. In 2016, growth seems likely to be reported at 6.7%, down from 6.9% in 2015. But some economists are arguing for a 2017 target as low as 6%. They say this will give the government more breathing space to resolve deep-seated issues relating to overcapacity and excess debt (both problems were part of the Work Conference’s agenda in 2015 too).

From this perspective, the idea is to shift talk away from steady growth to more of a focus on identifying risks and promoting economic reforms. Huang Yiping from the central bank’s Monetary Policy Committee was one of those to highlight that countries like China need to focus on structural reforms and reduce their reliance on looser monetary policy, for instance.

Turning on the credit taps at the start of 2016 led to a real estate bubble, which the authorities have spent much of the second half of the year trying to deflate. As other analysts have pointed out, household debt looks manageable at just 40% of GDP. But developers’ balance sheets are more stressed, with land prices rising more than five times faster than property values.

Ministry of Finance figures show interest payments by the sector reached a record Rmb410.7 billion during the first 10 months of 2016, up 41.2% year-on-year.

Credit ratings agency Standard & Poor’s says that China’s latest housing party is over but that most developers will avoid bankruptcy because their capital structures are solid enough to avert near-term defaults.

More generally, analysts seem to believe that GDP next year will be similar to 2016 because the government will boost infrastructure spending (again) and pursue a more accommodative fiscal policy.

The appointment of the new finance minister Xiao Jie – a former tax chief – adds credence to the view. The belief is that Xiao will push for individual and corporate tax breaks, letting the fiscal deficit widen from about 3% to 5% of GDP.

Last May’s switch to VAT from the previous tax regime has been cited as one of the government’s most underrated achievements this year. Last month, officials claimed that corporates have saved about Rmb326.7 billion ($47.46 billion) and that the government is confident of meeting its target of Rmb500 billion in savings for companies by year-end. There are plans to simplify the rules for VAT further in 2017. says the government has also been relatively successful in targeting overcapacity in the coal and steel sector, and it thinks shipbuilding will be targeted next year as well. On the other hand, some analysts were sceptical when the government said in November that it had met its target of cutting 45 million tonnes of excess steel capacity and 250 million tonnes of excess coal. As HSBC notes, “While this is a good start, we believe most of the capacity was already idle.” But the bank is more positive that more will be done in 2017. “We think the impact of capacity elimination will deepen,” it added. “We also expect stricter environmental rules to cause more supply disruptions.”

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