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What's Ahead for China's Economy: Slight Rebound or Moderate Fall?

As 2018 begins, China is looking at a year that starts with a strong foundation, but will likely bring slower growth.

Karen Liu and Steven Gu
    Feb 04, 2018 5:15 AM  PT
What's Ahead for China's Economy: Slight Rebound or Moderate Fall?

The total gross domestic product of China was 82.71 trillion yuan ($12.93 trillion) in 2017, according to a recent report from China's National Bureau of Statistics. With the help of government-dominated stimulus and an improving environment of international trade, this was the first time that China's GDP reached the threshold of 80 trillion yuan.

China has also achieved its first rise in GDP growth since 2010. Its GDP increased 6.9 percent, which was 0.2 percentage points higher than in 2016.

At the same time, other important macroeconomic data demonstrated a good scenario. The PPI (Producer Price Index) turned from negative to positive for the first time in the past five years. The price of coal, iron, and steel rebounded slightly, and exports increased 10.8 percent in 2017. There were a lot of job opportunities in Chinese cities in 2017, and the unemployment rate has dropped to the lowest point in the most recent five years.

About China


Estimated Figures

2017-12

2017Q4

2017

2018-1

2018Q1

2018

Economy   Growth & Trade







GDP(%)

-

6.8

6.9

-

6.7

6.6

Industrial value Added(%)

6.2

6.2

6.6

6.2

6.1

5.7

Investment   in Fixed Assets(%)

7.2

7.2

7.2

7.1

6.9

6.0

Nominal Consumption(%)

9.4

9.9

10.2

9.7

9.8

10.0

Export(%)

10.9

10.0

8.3

9.0

8.8

6.0

Import(%)

4.5

13.1

15.9

7.0

8.0

10.0

Trade Surplus($ billion)

54.7

133

430.7

56.6

71.1

383

Inflation   & Unemployment Rate







CPI(%)

1.8

1.8

1.6

1.5

2.7

2.3

PPI(%)

4.9

5.9

6.3

4.8

4.3

3.0

Unemployment Rate(%)

3.92

3.95

3.98

3.92

3.9

3.9

Money   & Credit







M2(%)

8.2

8.2

8.2

8.4

8.5

9.0

Deposit-reserve Ratio(%)

17.0

17.0

17.0

17.0

17.0

16.5

Source: Wind Info. System

From the perspective of different industries, the primary industry, including mining and energy, increased by 6.54 trillion yuan ($1.02 trillion), an increase of 3.9 percent over the previous year. The value added of the secondary industry, which includes manufacturing and construction, was 33.46 trillion yuan ($5.23 trillion), with a growth rate of 6.1 percent. The tertiary industry, also called the service sector, increased by 42.7 trillion yuan ($6.7 trillion), an increase of 8 percent.

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(Source: http://hibor.net/)

Consider the contribution of their growth to China's GDP. The primary industry in 2017 accounted for 0.3 percentage of GDP growth, which remained unchanged. The contribution of secondary industry to GDP growth was 2.4 percent, 0.1 percentage point lower compared with 2016. The tertiary industry accounted for 4.1 percent of GDP growth, that's an increase of 0.2 percentage points. From the viewpoint of production, the secondary industry declined slightly in 2017, while the service industry met an accelerating growth and provided a strong support to the growth of China's GDP.

In addition, though the growth of the secondary industry decreased last year, data would indicate that the growth of the construction industry was hindered by the poor performance of the real estate industry.

From the demand side, consumption made up about 4.1 percentage of China's GDP in 2017, down a slight 0.2 percentage points compared with 2016. The contribution of total capital formation and net exports to GDP growth was not released, but from the growth trend of fixed assets investment and the import and export, net exports were probably the main marginal power of GDP growth in 2017. That is supported by data from different quarters. There was a trend that the total capital formation was playing a declining contribution to GDP growth while the net export was showing an strong driving force to that. The current export growth had already been at a high level, which signalled it was not expected to go up further. But considering the import growth might meet more significant downward pressure in the future, it is anticipated that net exports will remain a large contributor to GDP growth.

Besides these quantitative results mentioned above, the common trend depicted by these results is also encouraging. 

It is worth mentioning that China's economic downturn in the past few years was not an uncontrollable fall, but an orderly and profound transformation and adjustment. China has gained momentum to improve its economic quality, and to exclude the backward capacity and some fraud in key industries. This is a transition, and it is not at the cost of the whole society. This is a harvest time for China of development as well as transformation. Obviously, it was not a period of stagnation.

The Year in Review

To sum up, in 2017, China's economy generally handed out a beautiful answer. But most factors of the economic recovery came from supply-side reform and an increase of industrial price, which might lead to the phenomenon that several monopolistic state-owned enterprises will enjoy the majority of the profits. If this problem remains outstanding, it is hard for China to maintain the sustainable economic growth.

It is expected that in 2018, China's consumption will remain stable. Investment in the real estate industry and infrastructure will lower the overall growth of fixed investment (and further influence total capital formation) and net exports will still provide a positive force, though China's positive export figures are the results of the global economy recovery. With the increase in economic volume and the rise of trade protectionism, analysts are not optimistic about China's export growth in 2018. Its marginal contribution to GDP growth may also be weakened.

China's economic growth still faces pressure in 2018. The current economic recovery has won a precious time for China's supply-side structural reform. It is estimated that China will continue to promote its financial regulation in 2018 to lower the systemic risk in its financial institutions. China has stated it intends to further improve the quality of its economic development, namely, high-quality growth. It also strives to improve both the quality and efficiency of its economic operation.

As mentioned above, in terms of the three key factors in economic growth, namely, investment, consumption, and import and export, it is anticipated that China's decline in economic growth in 2018 is an event with high probability. According to recent research reports released by Guoyuan Securities Co. LTD. and Pingan Securities, they all predict that China's GDP growth in 2018 will go down slightly to around 6.5 percent.

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