By Brian Jackson, China Economist, IHS Global Insight
Key Points:
- Chinese GDP growth accelerated to 6.8% in the fourth quarter, surprising on the upside compared to expectations of 6.7%. Industry
- Industrial value-added output slowed to 6.0% growth in December, a 5-month low.
- Fixed-asset investment growth decelerated to 8.1%, a 4-month low.
- China’s housing sector showed mixed performance in December.
- Retail sales growth accelerated to 10.9%, a 12-month high.
Outlook & Implications
Improved GDP growth in the fourth quarter was not the result of a resurgence in traditional industry. While some monthly data earlier suggested modestly improved performance among heavy industrials early in the fourth quarter, that halted and reversed at year end. In fact, compared to one quarter ago the only industrial sectors doing better in real terms are computers and communication equipment and general purpose machinery.
Importantly, ferrous and non-ferrous smelting are both performing much worse today than one quarter ago, despite a boom in prices, highlighting that most of the price change is because of government orders to cut supply, rather than a durable resurgence in demand. This pain in traditional industrial sectors will also likely be born out in GDP subsectors data available tomorrow, which we expect will show real estate service also decelerating slightly.
China faces three major challenges in 2017, the first being domestic economics. While the government is quick to note progress in its supply-side reform campaign, it is also admits that there are at least 4 years of additional cuts required before demand and supply are brought into a sustainable balance. Such cuts may seem less and less traumatic in the coming years, but they nonetheless will continue to present headwinds for overall growth.
Second, China faces a decidedly more combative international environment. 2016 witnessed at least two surprise election outcomes as a result of populist sentiment in developed countries. One component of that populism is placing blame on China’s trade and investment policies, rightly or wrongly, for labor market woes in those countries. While a full blown trade war remains outside of our baseline scenario, it is undeniable that the political winds are blowing in the direction of a more combative trade relationship. Even assuming relatively cooler heads prevail and trade war does not materialize, a growing number of trade disputes and anti-dumping actions are likely. China’s economy is highly diversified, and better prepared to meet such challenges than during the mid-2000s, but this does present a higher level of risk for its export manufacturing sectors that are already facing a range of challenges.
Third, 2017 is a key year for China to reaffirm a commitment to reform and accelerate the pace of implementation. Since 2013 China has regularly promised a range of economic reforms that would bolster productivity. Most of these are quite promising on paper, yet implementation has so far been too gradual to meaningfully dent China’s overall productivity trends. In many of these policies more ambitious implementation is hinted at after 2017-18, with experimentation the focus before then. This presumably is in reference to the expected consolidation of political power to take place in late 2017, when President Xi will have an opportunity to further shift central leadership closer to his preferred reform focus and pace. While expectations are currently limited to China continuing a gradualist approach, China’s best course of action would be to surprise on the upside by not only reaffirming its commitment on paper, but also pursuing a clearly faster pace of implementation starting during 2017.