HSBC: Restoring business confidence is the greatest challenge facing Chinese policymakers in 2017

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China’s economy grew by 6.8% in the December quarter compared to the same period a year earlier, leaving total growth in 2016 at 6.7%.

While the weakest annual growth seen since 1990, it was still smack-bang in the middle of the government’s 6.5% to 7% GDP growth target for the year, and defied the now perennial view of some analysts that the economic miracle would derail in spectacular fashion.

However, in order to achieve that result, policymakers had to turn to the growth levers used in the past — government spending, strength in residential property prices and debt — a concoction many believe will not be sustainable beyond the near-term to bolster economic activity.

Indeed, it appears that longer-term concerns over financial stability took a backseat in 2016, largely overlooked in favour of supporting near-term economic growth.

Having now had time to digest the Chinese GDP report, released last Friday, analysts are now having their say on what they expect will occur in the year ahead.

To Julia Wang, China economist at HSBC, while another small deceleration in economic growth is likely, to ensure that expected slowdown isn’t more pronounced, policymakers will need growth to be “firmer” with the drivers more “broader”.

In particular, she believes one area will be key in determining how the overall economy performs: private sector business investment.

“(This) is the key, as the private sector accounts for over 70% of output and over 80% of urban employment,” she wrote in a report released on Monday. “Despite fiscal stimulus which boosted public sector spending, private investment remained at very depressed levels (in 2016).”

According to data released by China’s National Bureau of Statistics (NBS), private fixed asset urban investment grew by just 3.2% last year, well below the 18.7% lift reported by China’s public-sector firms over the same period.

This, she says, saw “private sector confidence decline steadily”, noting that with many private sector firms saw greater investment opportunities overseas rather than in the domestic economy, exacerbating capital outflows during the year.

Source: HSBC

Wang says that “to reverse the trend, a range of policies from tax and fee charges reduction, to faster state-owned enterprise (SOE) reforms are needed”, suggesting that this not only holds the key to more sustainable growth but also reduced capital outflows.

“The fundamental solution lies in boosting private sector confidence,” she says.

“SOE reforms, such as shutting down ‘zombie’ SOEs and accelerating debt resolution, will help to give more business opportunities to the private sector and boost confidence in the outlook of the economy.”

Despite uncertainty as to whether or not that can be achieved, Wang sees only a modest slowdown in Chinese economic growth in 2017, forecasting a step-down to 6.5% as continued government infrastructure investment offsets a likely slowdown in property market activity, particularly in the nation’s largest cities.

“From a cyclical perspective, even as real growth may still slow in 2017 compared with 2016, the slowdown will be marginal and will not derail the reflationary trend which is good for the economy from a business profit and debt burden perspective,” she says.

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