2017

China’s Macroeconomic Analysis and Forecast

(Issue No.2)

China’s Economy Strive to Bottom

Working Papers（No.78）

Center for China in the World Economy, Tsinghua University

Issued on March 12, 2017

China’s Economy Strive to Bottom

■ China’s economic situation: Fixed asset investment – its growth is expected to slowly rise, and the trend

will decline in the first half but rise in the second half of the year.

Real estate – its growth rate goes down, continuing to adjust.

Import and export – the risks increase in global trade and the export is

difficult to keep slow recovery.

Price index - CPI maintains a smooth running. PPI lacks of momentum for

rising.

Corporate profits – Growth continues but narrows.

Consumption - car sales stamina is insufficient; retail growth is not

optimistic.

■ China’s economic risk: Exchange rate and capital flows - the RMB exchange rate tends to

stabilize and the pressure of capital outflow slows down.

Deleverage - the government has a room for debt and orderly guide the

bond default.

■ “Trump risk” still exists, be vigilant of domino black swan.

■ Expert column Li Daokui: Create conditions, and strive to make China’s economy in the

bottom of this round of growth adjust in 2017.

Yuan Gangming: China’s economy can only move from virtual to real and

keep stable in slowdown.

CCWE Macro Forecast Project

Members:

Li Daokui, Yuan Gangming,Like

Aobo,Feng Ming, Wu Shuyu, Shi

Jinjian, Zhou Di, Jin Xingye, Hu

Sijia, Chen Dapeng, Zhang Chi,

Chen Yifan, Wang Xushuo

Contact information

Tel: 010-62797782

Website:

www.ccwe.tsinghua.edu.cn

Data source: National Bureau of

Statistics, People's Bank of

China, CCWE

For 2016, China’s GDP growth rate was 6.7%, hitting a lowest record for the

past 26 years. However, the bottoming process has not yet ended. Since the second

half, some economic data happened to positively change as the trend to stabilize at

certain stage stood out, which was embodied by narrowing of decline in the growth

and improvement of the growth quality and efficiency. The trend in slowing of

decline and being stable began to occur. The “steady progress” will become the

overall tone for the economic work in 2017.

In 2016, China’s Marco-economy had three important bright spots. First, the

economic structure continued to improve; Second, the right to speak in the

international economic and financial areas continued to improve; Third, new

economy, new format and new momentums were emerging and grew up as to

become the important impetus to drive economic restructuring and movement

conversion. In 2017 China’s economy is facing three major risks: first, the

international situation is chaotic, especially Trump’s new policies may bring

uncertainty to the international economic and financial environment; second, the

financial sector is facing the continued depreciation of RMB and capital outflows,

banks’ non-performing rate increasing, high leverage ratio of non-financial

enterprises and risk of local government debt fermentation; and third, the growth rate

of private investment and its closely related manufacturing investment is wandering

at a low level, and the sustainability of periodic recovery is waited to be observed.

Based on the above analysis, the CCWE predicted that China’s economic

growth rate would be 6.6% in the first half of 2017, and the annual growth rate 6.6%.

2015 2016 First half of

2017

2017

GDP (%) 6.9 6.7 6.6* 6.6*

CPI (%) 1.4 2.0 2.0* 2.1*

PPI (%) -5.2 -1.4 6.9* 6.0*

Export, year on year (%) -2.8 -7.7 -2.0* -3.5*

Import, year on year (%) -14.1 -5.5 0.5* -0.5*

M2 balance, year on year (%) 13.3 11.3 12.4* 11.9*

Retail, year on year (%) 10.7 10.4 10.2* 10.0*

Fixed assets, year on year (%) 10.0 8.1 8.3* 8.6*

Note: * represents the forecast value, all indicators are the accumulative year-on-year

growth from the beginning to the end of the year, except for M2.

GDP growth, quarterly accumulative

year on year

CPI growth, quarterly accumulative

year on year

Growth in fixed asset investment,

quarterly accumulative year on year

M2 growth, quarterly accumulative

year on year

Center for China in the World Economy 1

I. China’s economic situation

Since the second half of 2016, China’s economy began to show a steady trend, and most of the economic data

have happened to positive changes. In view of the macro data, since the beginning of the year private investment

stopped a cliff-drop decline and began to stabilize from August, directly leading to phase stabilizing of investment

growth. Industrial enterprises significantly improved their profits, and the annual growth rate (8.5%) increased by

10.8% compared with 2015 (-2.3%). The year-on-year growth rate of PPT ended a four and a half year of negative

growth in September, 2016, back to the growth range. In view of the micro data, power generation, freight volume,

and performance of listed companies have improved to varying degrees. Overall, although China’s economy is still

in the bottoming process, 6.7% of GDP growth also hits the lowest record for the past 26 years. However, the

decline in economic growth rate continues narrowing, and the quality of economic growth continues to increase as

the trend gradually appeared: the decline became slowing and steady, and even the economy turned good. The

“steady progress” become the overall tone of economic work in 2017.

Looking back 2016, China's economy presents three bright spots. First, the economic structure continues to

improve. From the industrial structure, in 2016 the proportion of added value of the tertiary industry reached 51.6%,

1.4 % higher than in 2015. The industry internal structure is also constantly adjusted and optimized. The high-end

manufacturing of the secondary industry and the financial services, and the internet services of the tertiary industry

continued to grow in the proportion. From the domestic demand, investment and consumption structure continued

to improve and the contribution rate of final consumption to economic growth in 2016 was 64.6%. According to the

Center for China in the World Economy (CCWE) of Tsinghua University, the proportion of China’s consumption in

GDP in 2016 would exceed 47%, and over 50% expected by 2020. The investment-driven growth model is

gradually changing. From the foreign trade structure, despite of severe situation and increasing volatility, the export

structure has continued to improve. High-tech, high value-added exports represented by high-speed rail,

communications equipment manufacturing, machinery and heavy industry are rising in the proportion. Second,

China’s voice in the international economy and financial fields continues to improve. On the one hand, China’s

GDP growth in 2016 ranked the first among the world’s major economies, contributing more than 30% to the

world’s economic growth and continues to play the most important engine of global economic growth. On the other

hand, China successfully held the G20 Hangzhou Summit in 2016. President Xi Jinping made an important speech

at the Davos forum, the RMB entered SDR, AIIB and BRICS Bank were in smooth operation, and the “belt and

road” strategy made positive progress. All the activities indicate that China is carrying the banner of international

economic and financial governance and the right to speak in the international community continues to improve.

Lastly, new economies, new industries, and new momentums are emerging and growing and become the important

impetus to boost the economic restructuring and momentum conversion. New strategic industries represented by

high-end equipment manufacturing, new energy and new materials, new generation of information technology,

bio-pharmaceuticals, energy conservation and environmental protection have accounted for 10% of GDP. The

sharing economy represented by Mobai and Ofo sharing bicycles develop rapidly and become all the rage at the

moment, as a classic practice of “Internet + traditional industry”.

Looking ahead 2017, China’s economy is facing three major risks. First, the international situation is chaotic,

especially Trump’s new policies may bring uncertainty to the international economic and financial environment.

Trump came to stage and may implement trade protection, infrastructure investment, the FED’s rate hike, fiscal

stimulus and other measures that will have an impact on the global economic and financial markets, especially for

China’s export growth and exchange rate stability. The EU’s weak economic recovery, political elections, refugee

problems, poor banking, conservatism and other issues will bring uncertainties to the EU and the global economic

growth and financial stability. The differentiation between developed and emerging economies and among

Center for China in the World Economy 2

emerging economies will further stand out and the global liquidity may face a short-term inflection point. Second,

the domestic financial sector is facing potential risks, and improper response may bring disaster to the overall

situation of “steady progress”. On one hand, depreciation of the RMB exchange rate and the risk of capital outflows

still exist, and their feedback loop tends to deteriorate. On the other hand, the bank’s non-performing rate slows

down, but has not been fundamentally curbed. Lastly, the leverage rate of non-financial enterprises is relatively

high, and the risk of local government debt gathering is still fermenting. Third, private investment and its closely

related manufacturing investment are still hovering around 4% in terms of the growth rate. The stainability of

periodic recovery needs to be observed. Especially the current problem of “moving from real to virtual economy” is

quite serious, and the spontaneous power from private investment is still insufficient, under these circumstances,

the foundation isn’t enough strong for private investment, accounting for more than 60% of the total investment, to

stabilize. This will directly affect realization of stable investment and growth target.

Based on the above analysis, CCWE predicts that China’s GDP growth rate would be 6.6% in 2017.

1. Fixed asset investment: growth is expected to recover slowly and the trend will go down in the first half

but up in the second half of the year

For the whole year of 2016, the national fixed asset investment amounted to 59.6501 trillion RMB, year on

year up by 8.1%. The investment growth has been stable more than 8% for five consecutive months, and the

characteristics of periodic recovery further appeared. Investment growth declined from 10.2% at the beginning of

2016 to 8.1% at the end of the year, the trend was high in the first half but low in the second half of the year. The

sharp decline in manufacturing investment and private investment growth is the main reason for the slowdown in

investment growth throughout the year, while infrastructure investment and other investments1 have become the

main force of stable investment. The decline in manufacturing investment and private investment growth has

dragged down the fixed asset investment in the year by 1.2 % and 4.3% respectively. From the contribution to fixed

asset investment growth, infrastructure investment and other investment contribution rate was 39.2% and 29.4%

respectively, which together led to nearly 70% of investment growth. In 2016 real estate investment growth (6.9%)

happened to a substantial rebound, compared to 1% growth rate in 2015 than, but still lower than the overall

investment growth. It means that real estate investment growth is still dragging the overall investment growth, but

releases a little compared to 2015.

Figure 1 Year-on-year growth of fixed asset investment and components

Source: National Bureau of Statistics

Looking ahead 2017, investment growth is expected to achieve a slow recovery, the trend would be low in the

first half but high in the second half of the year. It will mainly benefit from the slow recovery in manufacturing

1 Other investments are defined as: other investments = fixed asset investment - manufacturing investment - real estate

investment - infrastructure investment, calculated using data from January to December of 2016, manufacturing

investment in construction, real estate investment, infrastructure investment and other investment accounted for 31.5%,

17.2%, 19.9% and 31.4% respectively.

Year-on-year growth of fixed asset

investment Year-on-year growth of

infrastructure investment

Year-on-year of private fixed asset

investment

Year-on-year growth of real estate

investment Year-on-year growth of

manufacturing investment

Center for China in the World Economy 3

investment and rapid growth in infrastructure investment.

First, from the main components of fixed asset investment, the manufacturing investment accounting for

nearly one-third, its growth is expected to maintain a slow recovery trend and annually return to 6% to 7%. There

are two reasons for that, first, PPI and CPI will remain moderate growing in 2017 and lead to further improvement

of industrial enterprises’ profit, including manufacturing industry. Moreover, the manufacturing return of

investment will also be improved. In addition, the manufacturing purchasing managers’ index (PMI) in February

2017 was 51.6%, continuing to remain in the expansion range and exceeding 50% for seven consecutive months.

This data also shows that the manufacturing industry has steady signs for recovery. Second, tax cuts and other

cost-reducing measures will further benefit the manufacturing enterprises and bring a momentum for new

investment in enterprises.

Second, infrastructure investment is still the main force for steady investment and steady growth in 2017, and

it is expected to maintain a high growth rate of 18% to 20% throughout the year. Although the current fiscal

revenue growth slows down and the contradiction between fiscal revenue and expenditure is more prominent,

taking into account that the actual fiscal deficit in 2017 is likely to further expand and the current infrastructure

investment fund accounts for no more than 20% in the budget, and a lot of other funds are mainly from the local

government and corporate self-financing, bank loans and PPP project financing, the financial revenue and

expenditure problems will not form a greater constraint on the rapid growth of infrastructure investment. By the end

of 2016, the National Development and Reform Commission had introduced three batches of PPP projects with the

total size of 6.37 trillion RMB. It’s expected to be 3.8 trillion RMB settled for 2017 PPP projects, which will

strongly support the rapid growth of infrastructure investment.

Third, the investment growth in the northeastern region in 2016 appeared cliff-drop decline even by more than

30%, but the current decline has narrowed. With a series of central and local measures for northeast revitalization

introduced and promoted, some provinces’ statistics “excluding inflated figure” work completed and reference

changes, the investment growth rate in Northeast China will continue to narrow, is expected to turn positive by the

end of the year. All these actions will help the overall investment growth slowly recover.

The slow recovery in investment growth in 2017 may be subject to the following factors. First, as influenced

by new property market regulations and policies on suppression of asset bubbles, the real estate investment in 2017

will gradually slow down, and is expected to grow at around 2.5%. Second, although the current private investment

growth rate is temporarily stabilized, it’s still hovering at a low level of about 3% -4%. Private investment is still

restricted by issues, such as that the real economy gets a low rate of return and financing is difficult and high costly.

Private investment accounted for more than 60% of the total investment, its growth rate reflects the strength of

spontaneous economic growth, only the private investment in real steady recovery can boost up the real investment;

otherwise the foundation for steady investment is still relatively frail if relying on infrastructure and real estate.

Based on the above analysis, CCWE predicts that the fixed asset investment growth would be 8.6% in 2017.

2. Real estate: the growth rate goes down and continue to adjust

2016: from demand release to decline in the growth

China’s economy remained stable in 2016 as the real estate market has made important contributions.

According to the information released by the Bureau of Statistics, the annual contribution rate of real estate to

Center for China in the World Economy 4

economic growth is about 7.8%, and the contribution rate of real estate to total investment growth is 14.7%.

In 2016, commercial housing sales area reached 1,573.49 million square meters, with an increase of 22.5%

over the previous year, and a drop of 1.8% compared to the growth rate over January-November. Commercial

housing sales was 11.7727 trillion RMB, with an increase of 34.8%, but down by 2.7% in the growth rate. Such

good sales came from full demand release. From September 2014 to February 2016, the government introduced

four easing policies, including release of purchasing restrictions, downregulate of down payment proportion,

reducing interest rates and deed tax relief, which all were intended to reduce the real estate inventory.

Figure 2 sales of real estate Figure 3 prices of real estate

Source: National Bureau of Statistics, wind database Source: National Bureau of Statistics, wind database

Overall, good sales made a good achievement in reducing the inventory. However, there is a big difference in

the inventory reducing cycle of between residential and non-residential commercial building. By2December 2016,

the broad real estate inventory reducing cycle was estimated down to be 48 months based on the form of “for sale +

under construction”, reduced by 5 and 6 months respectively compared to 2015 and 2014 on a year-on-year basis,

indicating a significant achievement in de-inventory. In view of the subtypes, by December 2016 the

inventory-sales ratio of residential building was 38 months, while that ratio was 104 months for non-residential

building. Although both are at low levels compared to the same period since 2013, the difference is significant. This

means that at the real estate market the non-residential building bears much higher pressure in inventory reducing

than the residential building does.

Figure 4 Time required to resolve the inventory (Unit: month, red dotted line shows the inventory-to-sales ratios of

November over the past years.)

2 CCWE uses the broad inventory-to-sales ratio to reflect the inventory of commercial building and the time

required to reducing the inventory. The inventory-to-sales ratio of commercial building is defined as the ratio of the

inventory of commercial building over the sales in a certain period (usually a month). The formula is: the broad

inventory-to-sales ratio of commercial building = (“for sale” area + “under construction” area) / average monthly

sales area of commercial building. Where, the average monthly sales area of commercial building is the moving

average of sales area for last 3 months; the “under construction” area includes residential construction area, office

building area and commercial business construction area.

Sold area of commercial residential

building: year-on-year growth

Sales of commercial residential

building: year-on-year growth

100 cities’ housing price index (

Year-on-year growth)

100 cities’ housing price index

(month-on-month growth)

Center for China in the World Economy 5

Data source: WIND database

In 2016, the national real estate development investment reached 10.2581 trillion RMB, with a nominal

increase of 6.9% over the previous year (an actual increase of 7.5% if excluding price factors), and the growth rate

increased by 0.4% over January-November. The area of houses constructed by real estate enterprises reached

7,589.75 million square meters, up by 3.2% over the previous year, and the growth rate increased by 0.3% over

January-November. The area of new construction was 1,669.28 million square meters, with an increase of 8.1%,

and growth rate up by 0.5%. The completed area reached 1,061.28 million square meters, with an increase of 6.1%,

and growth rate down by 0.3%. In 2016, the area of land purchased by real estate enterprises reached 220.25

million square meters, down by 3.4% over the previous year, and a decrease of 0.9 % over January to November;

land transaction price was 912.9 billion RMB and went up by 19.8%, with the growth rate down by 1.6%.

Figure 5 Year-on-year cumulative real estate investment Figure 6 land acquisition and new construction area

Source: National Bureau of Statistics, wind database Source: National Bureau of Statistics, wind database

2017: to enter the down channel

We believe that the real estate market may reach its peak after the round of rally in 2016 and face a greater

downside risk in 2017 due to the following reasons:

Stringent policies are induced to suppress demand at all rounds

The strength to restrict housing purchase and loaning was unprecedented as it had affected a quarter of sales

Broad inventory-to-sales ratio for residential

building

Broad inventory-to-sales ratio for non-residential

building

Real estate investment

(year-on-year growth)

Area of purchased land (year-on-year growth)

Area of new construction for residential building

(year-on-year growth)

Area of completed construction for residential

building (year-on-year growth)

Center for China in the World Economy 6

area, more than one-third of real estate investment, and nearly half of real estate sales. During the National Day,

over 20 cities re-implemented or updated the loan restriction policy, with the purpose to curb the local

upgrading demand for two and above houses as well as the investment demand from people holding foreign

household registration. Based on our calculations, the area of real estate in purchase-restricted cities accounts

for 25% of the total sales area across the country and 36% of total investment and 48% of total sales. Since then,

some hot cities have tightened the policy and continued a second adjustment where in the industrial policy,

strictly implemented the purchase restriction policy to raise the purchase threshold.

In addition, the “house is used to live rather than to speculate” was proposed at the 2016 central economic

work conference, which is obviously different from the idea of “reducing inventory” of real estate last year. In

addition to the policies to curb demand such as “macro-custody of the currency” and “strict restrictions on credit

flowing to speculative buyers”, other policies like “increasing the land supply, increasing the proportion of

residential land, activating restricted and offset land in cities” are used to cool down the real estate market. Under

the tone of new policy “to curb asset bubbles and prevent financial risks” in 2017, the easing policy environment

for the real estate industry will no longer exists. As influenced by all-round demand compression and increment in

land supply, the real estate market is difficult to form a rally in 2017.

Mortgage leverage rises quickly

Over the past four years, the leverage by which residents purchase houses has been accelerating on the rise: in

2012 new personal purchase loans accounted for only 17% of commercial housing sales, while by the end of 2016,

this proportion had climbed to 42%, meaning that half of the payment of residents in the first three quarters of this

year came from the leverage. Therefore, the demand of residential buyers is largely influenced by the bank’s credit

policy, which further amplifies the impact of the current tight lending policy. In addition, the purchase leverage

ratio in recent years has been rising rapidly by large, which violently restrict the following leverage space. So at the

current time, the probability of to increase the leverage ratio in future is small, and it is difficult to form an effective

support for real estate sales.

Figure 7 the housing purchase leverage ratio for the first three quarters over past years

Data source: WIND database

Based on the above analysis, CCWE believes that the growth of real estate investment in 2017 will decline to about

2.5%.

3. Import and export: global trade risks increase, and exports recover a little but difficult to maintain

New personal housing loans/sales

of commercial residential building

Center for China in the World Economy 7

According to the General Administration of Customs (in US dollar), China’s total import and export in

2006 reached US $3.685591 trillion, with accumulative growth of -6.8% year on year. The total import was US

$ 1.587430 trillion, with accumulative growth of -5.5% year on year. The total export reached US $ 2.098161

trillion, with accumulative growth of -7.7%. Trade surplus amounted up to US $ 510.731 billion. Wherein,

China’s exports and imports have been declining for two consecutive years. In 2017, the preliminary results

from the General Administration of Customs showed that China’s export from January to February amounted

to US $ 302.81 billion, up by 4.0% year on year, while the import amounted to US $260.69 billion, up by 26.4%

year on year, and in February the trade was a surplus.

As shown in Figure 8 and Figure 9, the year-on-year cumulative export of 2017 turns positive due to the poor

performance in early 2016. Moreover, the export in February of 2017 declined compared to the same time of 2016.

The year-on-year cumulative growth and month-on-year cumulative growth substantially turns positive in 2017,

indicating that China’s import does improve at the beginning of 2017. In view of China’s imports and exports

falling in the early 2016 compared to previous year, we calculated the year-on-year growth of January to February

of 2017 over the same time of 2015, the export calculated is -17.90% and import is 4.67%.

Figure 8 Cumulative year-on-year import and export growth Figure 9 Month-on-year import and export growth

Data source: WIND Database Data source: WIND database

Export: small growth at the beginning of the year but there is a worry about its sustainability

By analyzing export economies, we find that although China’s exports to major economies have increased

compared to the period from January to February of 2016, it declined significantly compared to the same time of

2015, indicating that the cumulative increase in export in 2017 reflects a slight improvement, just relatively higher

than previous year, but in fact China’s export in 2017 will remain in a relatively sluggish.

Another concern is that the trade balance in February 2017 has been the first deficit since February 2014. To

this end, after comparing the export data over the years, we find that most of trade balance in February will decline.

We believe that the reason for the decline is that in January each year many companies will sign a trade contract,

resulting in the decline in February.

We believe that compared to 2016, China’s exports in 2017 will face with greater risk instead:

First, since 2012, the global trade growth rate has been lower than the economic growth rate and this situation

Export amount: year-on-year growth

Import amount: year-on-year growth

Import and export amount: year-on-year growth

Export amount: month-on-year growth

Import amount: month-on-year growth

Import and export amount: month-on-year growth

Center for China in the World Economy 8

will probably continue in 2017. The world economic growth prospects are not optimistic this year, so under the

background, the global economy will face the pressure in export.

Second, the global trade risk increases and there is a probability that the United States and the EU’s import

from China will decline significantly. The trade protectionism elicited by the new US President Trump’s Border

Adjustable Tax (BAT) policy and the squeezing effect of “Made in USA” on “Made in China” in the US market

induced by the manufacturing industry back-home policies will deteriorate China’s export to the United States. The

euro area will usher in the election this year, if a series of black swan incidents, on one hand they may lead to the

euro exchange rate collapse, on the other hand will also affect the euro zone economic recovery, which will impact

China’s export to the EU.

Table 1 Analysis of export economies

Percentage of total export Accumulative growth,

year-on-year (referred to

Jan-Feb, 2016)

Accumulative growth,

year-on-year (referred

to Jan-Feb, 2015)

Total export 100% 4.01% -17.90%

Export to US 18.34% 1.93% -14.28%

Export to EU 17.05% -0.77% -16.17%

Export to ASEAN 12.21% 0.32% -24.52%

Export to Japan 6.66% 1.88% -11.02%

Data source: wind database, CCWE calculation

Based on the above analysis, CCWE predicts that the cumulative export growth rate would be -3.5% for 2017.

Imports: profit improves and restock boosts import

Since 2017, China’s import does have a more positive performance. Further based on the latest available data

(updated only by January 1, 2017 according to import categories), we break down the imports to analyze the

reasons for the increase in imports at the beginning of the year. As shown in Table 2 all of China’s 22 imported

products are divided into three categories: industrial, consumer and other imports3. The results show that the largest

contribution to imports is industrial imports (contribution percentage, 14.10%), while the largest contribution to an

industrial import is mineral product (contribution percentage, 11.04%). Mineral product includes a very important

subcategory: fossil fuels, mineral oil and its distillation products, asphalt material and mineral wax.

The growth of industrial imports was analyzed with consideration on the industrial enterprises’ profit and PPI.

As the fixed asset investment and price indices described in the report, due to the PPI and CPI moderately rising in

2017, the profits of industrial enterprises, including manufacturing profits, have been further improved, and the PPI

prices rising is also steady passing from upstream to downstream sectors. This shows that there have been signs of

recovery for domestic industrial enterprises and manufacturing sector in the short term, which will form a

momentum for growth of industrial imports. In this context, the year-on-year cumulative growth for inventory of

3 Specific classification criteria are as follows, industrial imports: mineral products, electrical and mechanical, audio and video equipment and their

parts, accessories, base metals and their products, plastics and their products; rubber and its products, chemical industry and related industrial products,

textile raw materials and textile products, weapons, ammunition and its parts, accessories. consumer imports: jewelry, precious metals and products; imitation jewelry; coins; optical, medical and other instruments; watches and clocks; musical instruments; plant products; vehicles, aircraft, ships and

transport equipment; leather, fur and its products; saddlery and harness; travel goods, handbags; animal & vegetable oil, fat, wax; refined edible oil;

wood pulp; waste paper; papers, cardboard and their products; food; beverages, wine and vinegar; tobacco and products; works of art, collectibles and antiquities; shoes, hats, umbrella; processed feathers and their products; artificial flowers, human hair products; miscellaneous products, wood and

wood products, charcoal; softwood; knots; living animals; animal products; stones, plaster, cement, asbestos, mica and similarities; ceramic products;

glass and its products. Other imports: special traded goods and unclassified goods.

Center for China in the World Economy 9

products by China’s industrial enterprises turned positive compared to November 2016, and reached 3.20% in

December 2016. We believe that a new round of restock will continue in 2017 and contribute to the import. The last

thing that can’t be ignored is the rise in prices of bulk commodities. Although the current international oil prices

have stabilized, still it brought some bonus for the growth rate of imports compared to previous year. To sum up the

analysis, we believe that the growth rate of industrial imports is due to improved profits of industrial enterprises,

increased demand and a new round of restock.

As for the import of consumer goods, we believe that consumption growth in 2017 and its stimulating effect

on the economy will decline, so the import will not have too obvious improvement.

Table 2 Contribution rates of imports and trades

Import Category Contribution

Percentage

Category with the biggest

contribution to decline

Sub-category

percentage

Industrial

14.10%

Mineral products 11.04%

Chemical industry and its

related products 1.79%

Consumption 1.66%

Vehicles, aircraft, ships and

transport equipment 1.39%

Plant products 1.00%

Others -0.39% Special traded goods and

unclassified goods -0.39%

Source: Wind information, CCWE calculation

Based on the above analysis, CCWE predicts that the cumulative import growth rate would be -0.5% in 2017.

The final trade surplus would be US $ 445.2 billion.

4. Price indices: CPI remained stable, PPI growth weakened

In 2017, the national consumer price index rose by 2.5% in January and by 0.8% in February. For the first two

months of this year, the volatility of the CPI is mainly due to the Spring Festival holiday in January while last

Spring Festival holiday in February. By averaging the figure over the first two month of 2017, the national

consumer price level rose by 1.7% compared to the same period last year, and by 2% compared to the 2016 annual

CPI. However, the current CPI runs in a reasonable range.

It is noteworthy that the CPI has the upward driving force mainly from non-food and service prices. The food

prices in February fell by 4.3%, non-food prices rose by 2.2%, consumer goods prices fell by 0.1% and service

prices rose by 2.4%. In February of this year, the national average temperature was significantly higher than

previous years, which was conducive to fruit and vegetable growth, and the market supply was thus adequate.

Additionally, the market demand weakened after the Spring Festival holiday, fresh vegetable prices fell by 5.4%

month on month, causing the CPI down by 0.15%. Pork prices fell by 0.9%, causing the CPI down by about 0.03%.

Except food and tobacco, however, prices of health care, education, culture and entertainment, transportation and

communications and service went up year on year. Looking back to January of this year, non-food CPI increased by

0.7% month on month, the highest growth since September 2004, significantly higher than the previous Spring

Festival month. In future, prices of tourism, medical, education and communications will have an increasingly

important impact on CPI fluctuations.

Center for China in the World Economy 10

With the prices of international bulk commodities running at high levels, currently we need to guard against

imported inflation, but not worry too much as the international bulk commodities has reached a record high, rising

space is limited, such as international oil prices go flat recently, indicating domestic fuel prices will also slow down

at the following stage. According to the CPI of previous years and the average trend of the chain, CCWE predicts

that CPI would rise by 1.8% year on year in the first quarter of 2017, and the annual CPI rise by 2.1%.

Figure 10 CPI year-on-year growth rate Figure 11 PPI year-on-year growth rate

Source: National Bureau of Statistics Source: National Bureau of Statistics

In January 2017, the ex-factory prices offered by the national industrial producer rose by 6.9% year on year,

up by 0.8% month on month. By February, up by 7.8% year on year and up by 0.6% month on month. Although

PPI is high since the beginning of the year, the main driver of the upturn in the two months comes from the hikes.

The hike in January was about 6.1%, and about 6.4% in February. In view of the month-on-month data, PPI gains

goes down for two consecutive months, and its upward trend is slowing. With the hikes weakened, PPI is bound to

appear “high in the first half but low in the second half” of the year.

In detail, prices of oil and natural gas extraction, oil processing, coal mining and washing industry go up

by1.1%, 0.8% and 0.1% respectively, which together cause PPI up by about 0.05% month on month, while has a

less impact on PPI growth compared to January, down by 0.26%. In addition, prices of ferrous metal smelting and

rolling processing, non-ferrous metal smelting and rolling processing, chemical raw materials and chemical

manufacturing go up 2.3%, 2.0% and 1.9% respectively, which together cause PPI up by about 0.4 % month on

month.

Although the current international oil prices at a high level, this week there are several steep falls in oil prices.

Oil prices fell all the way this week, mainly with US crude oil inventories rose and the dollar rose. By February of

this year, the US API and EIA crude oil inventories hit a new high, which, to a certain extent, eases the international

supply and demand. Moreover, at the current moment, the OPEC member countries and non-OPEC oil-producing

countries have not yet clearly stated that the current production reduction agreement to be expired in May this year

will continue to be implemented. From the market demand, the global demand for crude oil may become weak. The

International Energy Agency (IEA) released a forecast on Monday (March 6) that US shale oil production may

continue to grow and the demand for refined oil in Europe will reduce. This trend will not help deal with the global

oversupply, and the rise in international oil prices is thus limited.

From the number of industries, the six major industries mentioned above together cause the PPI up by about

CPI: year-on-year growth

CPI: moth-on-year growth

PPI: year-on-year growth

PPI: moth-on-year growth

Center for China in the World Economy 11

6.3%, accounting for about 80% of the total gain. Of 40 industrial categories investigated, prices of products from

33 industries rise year on year, comparable to that in January while up by 1% compared to December last year. It

can be obviously seen that price increases have been extended from the upstream to the downstream industries, and

the number of rising industries is basically stable.

According to the average PPI year-on-year and month-on-month trend of previous years, CCWE predicts that

PPI would rise by 7.2% for the first quarter and rise by 6% year on year by the end of 2017.

5. Corporate profit - growth continues but gets narrowed

We believe that the rise in profits of industrial enterprises mainly benefits from the adjustment of supply and

demand. From the supply side, after 2016, the first year of “the 13th five-year plan”, the supply reform has achieved

some success as in the industrial field the “cutting overcapacity” measures ease the original imbalance between the

supply and demand, and raise prices of coal and steel, and to a large extent improve profits of the upstream

industries. On the other side, in 2016 influenced by the rapid growth of the real estate industry and the purchase

preferential policy of the automotive industry, from which related industries benefited and had a relatively good

income in 2016. In addition, in 2016 the PPI month-on-year growth turns from negative to positive, and the price

rebound is also an important factor for the growth of industrial profits.

According to the data, the manufacturing PMI index in February was 51.6%, continuing the good trend

beyond 50% since September last year. The non-manufacturing business activity index was 54.2%, although falling

back compared to the end of 2016, it still remains above 50%. The above index reflects that China’s industrial

development has continued to improve, and industrial enterprises’ profits, after a significant improvement in 2016,

still have a favorable support. The PPI in February rose by 0.6% month on month, and up by 7.8% year on year.

PPI’s continuing to rise also proves that the profits of industrial enterprises still have the conditions for the rise in

the short term.

However, in the long run, on one hand, the “cutting overcapacity” reform in the supply side has achieved a

great success, and objectively will face greater difficulties in further push; on the other hand, influenced by the

policies, the real estate market will slow down in 2017. As the purchase preferential policy is announced later and

the preferential rate not as well as last year, therefore, the car industry profits in 2017 will slow down as well. In

addition, the price of some bulk commodities has reached a high level, in the second half of 2017 the PPI trend will

also go flat, which will weaken the support for profits of industrial enterprises.

According to the above analysis, we believe that in a short term, profits of industrial enterprises will rebound,

but in a medium and long term, the profit growth rate of industrial enterprises will slow down accordingly.

6. Consumption: car sales stamina is insufficient; retail growth is not optimistic

In December 2016, the total retail sales of social consumer goods reached 3.1757 trillion RMB, up by 10.9%

year on year, of which retail sales of consumer goods above the quota amounted to 1.6945 trillion RMB, with an

increase of 9.8%. For the whole year of 2016, the total retail sales of social consumer goods reached 33.2316

trillion RMB, up by 10.4% over the previous year. Among them, the retail sales of consumer goods above the quota

amounted to 15.4286 trillion RMB, with an increase of 8.1%. Where auto consumption remained strong: in

December, auto retail sales rose by 14.4%, 2016 annual auto retail sales grew by 10.1% year on year. The car sales

Center for China in the World Economy 12

were up to 27.86 million vehicles in 2016.

However, one of the reasons why consumption did not reach a higher rate in 2016 was in that the bonus from

the second child policy was lower than expected. According to CCWE’s previous quarterly report, in 2016 the

second birth might become a driving force to stimulate consumption. According to family planning, hospital

delivery statistics and the birth population and pregnancy data from all provinces of China, the population born in

2016 would be 17.50 million, with an increase of 1 million compared to 2015, far below the previously estimated

2.50 million.

Despite the strong growth momentum in 2016, such good trend is more difficult to sustain after entering 2017.

One reason is that the steady recovery of residential consumption in 2016 mainly relied on the popularity of

car sales. In December 2016, the retail sales of social consumer goods increased more than 0.9% compared to

October, of which car sales growth rate rose by 6% over October, and in December car sales accounted for more

than 12% of the total retail sales of social consumer goods. Through calculation, it can be found that consumption

growth was mostly from the car sales. After entering 2017, despite the purchase preferential tax extending to the

end of the year, the late introduction of the new policy, and the preferential degree only half of that in 2016, there

was a very likely lead to car over-consumption in 2016, resulting in that such hot sales trend would be

unsustainable in 2017.

The other reason is that decline in the disposable income growth, to a certain extent, limits the purchasing

power of residents. For the whole year of 2016, the per capita disposable income of the national residents increased

by 6.3%, lower than the GDP growth rate for the first time for past five years. Where, the decline in rural

disposable income growth was more obvious, the gap between urban and rural areas has expanded in the trend. In

2016, China’s Gini coefficient was 0.465, going up compared with 2015, which was the first time to rise in recent

years. The decline in disposable income growth and the widening gap between urban and rural incomes will limit

the overall purchasing power of residents and adversely affect the further growth of consumption.

Figure 12 Year-on-year growth of retail sales of social consumer goods

Figure 13 Year-on-year growth of auto retail sales

Source: National Bureau of Statistics, wind database Source: National Bureau of Statistics

According to the above analysis, CCWE predicts that in 2017 total retail sales of social consumer goods

growth rate would be 10.0%.

II. China’s economic risk

Total retail sales of social consumer goods,

month on year growth

Total retail sales of social consumer goods,

year on year accumulative growth

Total retail sales of automobile,

month on year growth

Total retail sales of automobile, year

on year accumulative growth

Center for China in the World Economy 13

1. Exchange rate and capital flows: the RMB exchange rate tends to stabilize, and capital outflow pressure slows

down

Since 2017, the exchange rates of RMB against US dollar and the basket of currencies have stabilized. By

March 11, the exchange of onshore RMB against US dollar appreciated by 0.5% compared to the end of 2016, and

the offshore RMB appreciated by 1.2%. The offshore RMB was valued more than the onshore RMB, and the

exchange discount rates of both offshore and onshore RMB were down. While the exchange rate stabilizing, the

pressure on capital outflows has also slowed. Since January 2017 the foreign exchange reserves fell below US $ 3

trillion for the first time, while in February foreign exchange reserves appeared the first rebound since June last

year and returned to US $ 3 trillion and above. According to the Center of China in the World Economy (CCWE) of

Tsinghua University estimates, the broad capital outflow from January to February of 2017 was US $ 20 billion and

the outflow slowed down compared to US $ 549.2 billion in 2016 and US $ 755.5 billion4 in 2015.

Since 2017, the policies of the United States and other developed countries have uncertainty increased as the

US dollar index has fallen by about 1%, while the domestic investment, consumption, industrial enterprises profits

and a series of indicators have stabilized, which provides a better window for China to further promote the capital

market reform. When strengthening the authenticity audit of trade settlement, and careful management of the

cross-border investment and financing business of domestic enterprises, the internationalization process of the

interbank market has also been promoted. On February 27, 2007, the State Administration of Foreign Exchange

(SAFE) issued a notice to allow foreign non-central bank investors to participate in the domestic foreign exchange

derivatives market, a policy that would significantly reduce the foreign exchange hedging costs of foreign investors

and help to attract more foreign capital into the Chinese bond market.

Figure 14 Onshore offshore exchange rates of US dollar against RMB and

Figure 15 Exchange rate indices of RMB against the basket of currencies (December 31, 2014 as the base period)

Data Source: WIND Database, CCWE Estimated Data Source: CEIC Database, CCWE Estimated

The slowdown in capital outflows was mainly due to the decrease in the deficit of the current account

settlement

4 According to CCWE, the broad capital outflow=loss of foreign exchange reserve + trade surplus (including commodity

and service trade)-depreciation caused by exchange rate fluctuation.

Price difference (right axis)

US dollar against onshore RMB

US dollar against offshore RMB

Center for China in the World Economy 14

For the whole year of 2016, China’s broad capital outflow was about US $ 550 billion, compared with $ 20

billion from January to February of 2017, the net inflows appeared in February and reached about US $ 56.6 billion,

which was the first net capital inflow since December 2014. The slowdown in the rate of capital outflow was

mainly due to the narrowing of deficit in current account settlement. As shown in Figure 17, the daily settlement of

the bank on behalf of customers is broken down into current program and financial program, it can be seen that

fluctuations from the bank settlement and sales of foreign exchange under the current account go far beyond that in

capital and financial programs, and compared with last year, the depreciation of the bank settlement under the

current account in 2017 decreases significantly, from US $ 32.6 billion at the end of 2016 down to US $ 8.1 billion

in January of 2017.

Figure 16 Estimation of broad capital outflows

Figure 17 Balance of spot bank settlement and sales of foreign exchange on behalf of customers

Data source: WIND database, CCWE Estimated Data source: WIND database

The current account is further broken down into trade in goods and services. As shown in Figure 18, the

surplus of settlement and sales of trade in goods trade has increased compared with that of 2016, and both the

settlement ratio and the sales ratio of foreign exchange have steadily increased, and the gap between them is small.

In terms of trade in services, the exchange sales rate falls, while the exchange revenue rate increases, the scissors

between them is narrowing. These data indicate that trade practices and trade exchange settlement and sales are

being re-linked, and the audit on authenticity of trade exchange settlement and sales is gradually producing a good

policy effect.

Figure 18 Balance between spot exchange settlement and sales by banks on behalf of customers: trade in goods

Figure 19 Balance between spot exchange settlement and sales by banks on behalf of customers: trade in services

Estimate of capital outflow (100 million USD)

Net balance of bank’s settlement and sales of foreign

exchange on behalf of customers after adjustment of forward contract (settlement - sale of foreign exchange, 100 million

USD)

Balance of bank’s settlement and sales of foreign exchange

on behalf of customers: ordinary programs

Balance of bank’s settlement and sales of foreign exchange

on behalf of customers: capitals and financial programs.

Center for China in the World Economy 15

Data Source: WIND Database, CCWE Estimated Data Source: WIND Database, CCWE Estimated

The structure of capital outflow

According to CCWE, a capital outflow amounted to US $ 352.6 billion was hidden under the current account

in 2016, accounting for about 60% of total outflow. Specified by assets, current assets such as deposits of outflow

from capital and financial accounts contributed US $ 126.9 billion in 2016, accounting for about 22% of total

outflows. Direct investment in foreign currency contributed US $ 30.6 billion of net capital outflows, accounting

for about 5% of total outflow. US dollar securities (including bonds and stocks) contributed US $ 18.4 billion of net

capital outflows, accounting for about 3% of total outflows. Since RMB entered the depreciation range following

the reform of exchange rate in August-November, 2015, the outflow of capital has been still utilizing the trade

channel. The outflow of liquidity capital under financial programs is also a considerable part.

Figure 20 Capital outflow by BOP projects Figure 21 Capital flow structure by asset holding entity

Source: Wind database, CCWE calculation Source: People’s Bank of China, CCWE calculation

It is also worth noting that if diving the total capital outflow by holding entities, we find that the capital flows

from the household sector is much lower than the corporate sector. As shown in Figure 20, the household

Balance of bank’s settlement and sales of foreign exchange on

behalf of customers: trade in Services

Balance of receipt and payment of foreign exchange: service

Settlement-over-receipt ratio for foreign exchange: service

Sales-over-payment ratio for foreign exchange: service

Balance of bank’s settlement and sales of foreign

exchange: trade in goods

Foreign exchange settlement for trade in goods, monthly growth, in 100 million USD

Foreign exchange sales for trade in goods, monthly growth,

in 100 million USD

Trade Deposit Loan Direct investment Securities

Residential sector Enterprise Sector

Commodities Service

Ordinary programs Direct investment Securities others

Capital and financial programs

Center for China in the World Economy 16

sector-dominated capital outflow in 2016 was about US $ 90 billion, while the sector-dominated capital outflow

was about US $ 516.9 billion5, which indicates that the entity for current capital outflow is still the corporate sector,

and non-financial institutions leads the round of capital outflow in the name of import and export settlement and

foreign debt repayment in US dollars. Guan Tao (2016) believes that the domestic enterprises to accelerate foreign

debt repayment is the main channel for capital outflow. The CCWE’s calculations also support this argument. The

study shows that as depreciation of RMB is expected, enterprises accelerate the process of foreign debt repayment.

In 2016, the enterprise sector’s net repayment reached about 86 billion US dollars. In addition, many scholars

believe that part of the capital outflow from the central bank’s official reserves transfers to the household sector,

namely, “Foreign Exchange Held by the People”. However, according to the CCWE’s calculations, in 2016 the

household sector held additional 28.6 billion US dollars of deposits compared with the end of 2015, accounting for

only 6% of total capital outflow. It indicates that the vast majority of capital outflows is not converted into

household deposits, but transferred overseas through trade and investment of the enterprise sector.

Overall since 2017, as the state strengthens the audit of trade authenticity, the capital outflow significantly

reduced with the aid of trade channel, so the deficit of exchange settlement and sales under current bank account

narrows and the rate of capital outflow significantly slows down. In the context of the increasing uncertainty in

European and US policies, we still need to strengthen the guidance of liquidity capital, and closely monitor

cross-border funds and make response to the possible financial fluctuations at home and overseas in a timely

manner. On the premise of control of the corporate sector’s cross-border capital flows and reasonable guidance to

market expectations of the household sector, choose the right time to further promote the financial reform process.

2. De-leverage: the government has room for debt to orderly guide the bond default

There is room for government debt

By the end of 2016, China’s central and local government debt balance reached about 27.33 trillion RMB,

accounting for about 36.7% of 2016’s GDP, said Xiao Jie, Minister of Finance on March 7. This debt ratio is lower

than the EU’s 60% warning line, also lower than the current major market economies and emerging market

countries (Japan, 200%; the United States, more than 120%; Brazil ,100%; India, about 70%). We believe that the

Chinese government debt risk remains in the controllable range, and there is a certain debt space.

New debt shall avoid the “underground action” and implement the “sunshine project”. On one hand, to crack

down on illegal debt guarantees, and on the other hand, introduce new regulations to guide the local government’s

legal financing behavior.

In 2016, the investment in the infrastructure fixed assets reached 11.8878 trillion RMB, up by 17.4%.

Considering the momentum of a new round of infrastructure construction, Chinese government can issue

appropriate bonds on the basis of risk control to support good infrastructure projects. In addition to infrastructure

construction, we recommend local government pilot “real estate fund”, which can be sourced from local debt at the

mortgage of local government’s real estate as well as part of the income from land sales by the government. If these

5 When dividing the capital outflow by holding entities, we made the following assumptions: 1. Under the current account, the capital

outflow hidden in the goods trade is dominated by the corporate sector, while that hidden in the service trade (mainly tourism) is

dominated by the household sector; 2. The capital outflow related to securities investment, and direct investment is mainly

implemented by the corporate sector in that the as for securities investment, mainly financial institutions transfer the capital with

channels such as QDII , while direct investment is mostly related to state-owned enterprises and private enterprises; 3. Other

investment items only consider deposits and loans within the territory, including household deposits and loans, dominated by the

household sector, and non-financial enterprises deposit and lending, dominated by the corporate sector.

Center for China in the World Economy 17

debts can have real estate as collateral, interest costs will be relatively low and help reduce the government’s

financial burden.

Guide orderly default of the bond

Because of the implicit guarantee by the government and relevant agencies, some local government bonds and

trust products are expected for “rigid redemption”, which are supposed to default or reorganize, but can escape.

Moreover, these products are also committed to offer higher interest rates, so gained the favor of investors.

In fact, the high interest rate should be the risk premium to be provided in response to its larger reorganization

or default, but the current ratio of restructuring and default is far below that should occur. The entire financial

market and even regulators are reluctant to see the reorganization or default occurred. This has led investors to

blindly pursue high-return in financial products. This is essentially a question of the pricing of risk in China’s

financial markets. We should orderly guide the bond market default and restructuring, breaking the “rigid payment”

illusion, to guide the market pricing back to rational range.

The bond market is open to the outside world

In 2016, the RMB internationalization further advanced. RMB was included in the SDR basket, and the

international market demand for Chinese bonds rose accordingly. In 2016, overseas institutions issued over 600

billion RMB of “Panda debt” in the Chinese market, while more than 400 foreign investors invested in the Chinese

bond market, and the investment amounted to 800 billion RMB. Although RMB bonds are not eager to incorporate

a specific bond index, they will work toward this direction, said Governor Zhou Xiaochuan. General Secretary Xi

Jinping’s speech at the Davos World Forum also manifests that China has the ambition to hold a new banner of

globalization. In this process, it is necessary to promote the globalization of assets, within a reasonable range to

further open the domestic capital market. This can be for domestic enterprises to exploit new sources of funding for

investment, on the other hand foreign institutional investors can also strengthen the market management, and guide

rational pricing.

III. “Trump risk” still exists, and we shall be vigilant of domino black swan

In 2016, Trump was elected and the United Kingdom left the EU as the representative events indicating of the

emerge of trade protectionism and populism, the global economy is still at a low level, the trade pattern is also

facing deep adjustment. According to the recent forecast of the Organization for Economic Co-operation and

Development (OECD), in 2016 the global economic growth is expected to only 3%, together with 2015, is the

slowest growth for past five years. Looking ahead 2017, although China, the United States and the Europe have a

considerable short-term recovery resonance, and PPI and PMI pick up quickly, the slow growth of the world

economy and global environmental uncertainty will continue to be the two main themes of the international

situation.

1. The United States – “Trump risk” still exist, raising interest rates is almost forgone conclusion

According to the latest report of the US Department of Commerce, the US economic growth fell sharply in the

fourth quarter of 2016, and the growth rate was only 1.9%, significantly lower than 3.5% in the third quarter. From

the whole year, US economic growth rate was only 1.6% in 2016, hitting a lowest level for past five years.

Center for China in the World Economy 18

Although the US economic recovery in 2017 is still uncertain, the employment and manufacturing industry have

good performance. The US Department of Labor released the latest data on Friday, showing that in February the

United States non-agricultural employment increased 235,000 people, once again exceeding expectations. The

unemployment rate, compared to the previous value, decreased by 0.1%, labor participation rate rising by 0.1%.

The average hourly wages rose by 2.8% year on year and was in line with expectations. In view of sectors,

employment in construction industry, private education services, manufacturing, medical services and extractive

industries went strong. As shown in Figure 22, the number of initial jobless claims in the United States continues to

decline, indicating stronger health of the labor market. Meanwhile the US unemployment rate is also low, below 5%

unemployment indicates that the US job market is at or near full employment. Figure 23 shows that the US

manufacturing PMI has been more than 50 since September 2016 and is on the upswing; the year-on-year growth of

US gross industrial output by final product has been positive since August 2016. This shows that the US

manufacturing industry is in a slow recovery trend.

Figure 22 US unemployment rate and US initial jobless claims (person)

Figure 23 Year-on-year growth of US manufacturing PMI and US industrial output value by final product

Data source: wind Database Data source: wind database

In 2016 the US economic performance and recent economic data will largely strengthen the new President

Trump’s “American Priority” policy and strive to achieve the economic goal of “US’s 5% of nominal GDP growth”.

Although since Trump has come to power, the major policy shifts that he wants to achieve has not yet been

implemented, it does not mean that the “Trump risk” has weakened, and China needs to be highly concerned about

the relevant US economic policies and prepare for risk. We believe that the following aspects need to be addressed:

First, trade protectionism. Trump summarizes the trade advocacy concisely as “buy American goods, and hire

the Americans”. At present, the United States has withdrawn TPP. The Border Adjustment Tax (BAT) policy that

China is most concerned with has not yet been implemented. If BAT to be implemented, considering the high

proportion of China’s exports to the United States, China’s exports may be further deteriorated.

Second, to adjust the tax levy and strengthen the local manufacturing industry. From the end of 2016 and early

2017 data, the US manufacturing industry slowly recovers in the short term. To accelerate the return of the

manufacturing sector, Trump has advocated (1) for the US company that have overseas subsidiaries, to charge

one-off tax of 10% of the cumulative profits withdrawn; (2) to reduce the corporate tax from currently 35% to 15%.

If these policies are to be implemented, the import substitution of the US domestic market will increase, and will

also have an impact on China’s exports. It is reported that the new government tax reform program will be

Unemployment rate in US

Number of persons applying for

unemployment compensation for

the first time

Manufacturing PMI

Gross Industrial Output

Value-Final product, year-on-year growth

Center for China in the World Economy 19

submitted to the Congress in mid-to-late March.

Third, to raise interest rates in 2017. With the beautiful performance in employment and inflation data, the

Federal Reserve is likely to accelerate the process of raising interest rates. Yale and other Fed officials in early

March have introduced multi-round forward-looking guidelines been on the market. According to the Bloomberg

rate market check, the Federal Reserve in March will 100% raise interest rates, and so do in June. Based on the

CME “Federal Reserve Watch”, the Federal Reserve hikes the rate in March with a probability of 90.8%, and in

June interest rate of 95.9%. The Federal Reserve’s rising interest rate will lead to a stronger dollar, and that the

global liquidity is facing marginal contraction, the pressure of devaluation of RMB and capital outflows may be

enhanced.

Fourth, to strengthen the infrastructure construction. Trump said in a recent congressional speech that the new

government has proposed a US $ 1 trillion in infrastructure spending, which was nearly double than previously

projected US $ 550 billion. Infrastructure spending in the short term will drive aggregate demand in the United

States, playing a supporting role in economic recovery. In the long term, it will help to reshape the productivity and

competitiveness of the United States, in cooperation with Trump manufacturing industry policy proposition.

2. Europe – the economic recovery and differentiation co-exists, be vigilance of domino black swan

Recently, the economic growth in the euro zone, employment and PMI have a more positive performance. In

2016 the economic growth rate reached 1.8% in the euro zone, 1.6% more than the United States. In addition, PMI

reached 54.4 in the euro area in January 2017. With the overall economy showing signs of recovery, the

differentiation within the euro area is worthy of attention. In particular, it is important to note that the high

non-performing loan rate of banks such as Italy may become a risk event again in 2017.

Compared with the economic performance, the biggest risk in the Europe may come from political uncertainty

in 2017. The Netherlands, France, Germany, Italy and Belgium will usher in the election of the highest political

leaders, and the British will officially launch to leave the Europe. The European politics is likely to have domino

black swan incident. The current populism is growing rapidly in various countries: in the Netherlands, the Dutch

right-wing Freedom Party (PVV) leader, Wilders, to join the election on March 15, advocates anti-Muslim,

anti-immigrant, and anti-EU. In France, holding the “French priority” flag, the “French woman Trump”, Le Pen, is

likely to win in the election. In Germany, the member of right-wing populist party “Alternative for Germany”

(AFD), Petri is called “German woman Trump”, whose policy advocates against the euro and further European

integration, and to stop accepting refugees. Even the current Prime Minister Angela Merkel and her party are also

facing the pressure of public opinion and election and the policy advocates begin to have a tendency to reverse. If

these populist parties win in the forthcoming general election, it is likely that the result is that the Netherlands,

following the United Kingdom, will leave the Europe. The process of European integration has been hit hard, the

euro ushered in the crash, and the European economy would fall into a continuous sluggish.

Expert column

******************************************************************************************

Li Daokui: to create conditions, and strive to make the year 2017 as a turn point for China’s economy

rebound in the bottom via this adjustment

China’s economy has been declining for six consecutive years. By 2016, the growth rate should have fallen

Center for China in the World Economy 20

below the long-term growth potential of China’s economy. In other words, the current China’s economy runs at a

speed lower than the designed one. After several adjustments over the past few years, China’s economy in 2016

already have some important conditions to turn up in the bottom:

First, the problem of overcapacity begins to resolve, and the upstream industry prices begin to rise;

Second, after three consecutive years of decline in growth, foreign trade may be close to bottoming out;

Third, with the supply side structural adjustment gradually in place, a lot of industrial capacities, and profits

begin to recover, which is conducive to driving the relevant investment.

However, the above three important conditions can’t fully be sure that the China’s economy has begun to

bottom out. To make China’s economic growth in 2017 bottom out, and gradually build up the U-shaped bottom by

this round of economic structure adjustment, the following three things are still very important:

First, try to make the reform further implemented, especially through the reform to stimulate the original

driving force of economic growth, and resolutely continue to promote and complete the hard task to cut

overcapacity and make zombie enterprises quit. In 2017, we should especially strive to reduce the cost of business.

Therefore, the enthusiasm of local enterprises, especially private enterprises, should be promoted by mobilizing the

enthusiasm of local governments to promote growth. Particularly, it is recommended to build up the appropriate

fiscal decentralization, leave more fiscal revenue to local governments and make them have more capacity to

discharge or cut tax for private enterprises. In addition, it must cut overcapacity and quit zombie enterprises, which

is the necessary condition to ensure that this round of economic restructuring bottoms out. It must resolutely and

continually quit backward overcapacity enterprises, to make room for advanced production capacity as well as for

industrial upgrading.

Second, cool down the “high-fever” in the financial field. At present, many investors mistakenly believe that

some of the long-term construction, “rigid redemption” bonds are high-quality assets, their risk awareness is thus

imperceptibly reduced, also the market ROI is raised. Therefore, a lot of capital in the financial sector chase after

high-risk, low-return financial products, making the real economy, profitable, low-risk, low ROI not gain

investment. The “high fever” shall thus be cool down and under the control of the conditions and with intentions to

make some financial products reorganize and bankrupt, allowing the financial industry to re-establish risk

awareness and risk premium, also forcing the money into the real economy.

Third, reasonably address the impact of various risk factors from the outside, especially from the United States.

After President Trump took office, investors should not have unrealistic illusions about the US economy. In March

2017 to raise interest rates goes into a foregone conclusion, is likely to lead to pressure rising again in capital

outflows and the excessive depreciation of RMB. We must take a positive and pragmatic approach to handle the

pressure in capital outflows and devaluation of RMB in a way not arouse his suspicions, not loud noise and low-key

and secure.

If these three things can be adjusted properly in 2017, the bottom of the growth of the China’s economy in this

round of adjustment is likely to be formed in 2017. And after 2018 and 2019, China’s economic growth is more

likely to get a steady recovery.

Center for China in the World Economy 21

Yuan Gangming: China’s economy can get steady in the slowdown only turn from virtual to real economy.

The 2017 government work report announces that the GDP growth target would be around 6.5%, making it

better for the actual. China’s economic growth target has dropped by 0.5% over the previous year. Between 2013

and 2017, the growth target falls from 7.5% to 7%, 6.5% -7%, and finally to 6.5%. The real growth is lower than

the target, from 7.7% to 7.4%, 6.9% and 6.7% from 2013 to 2016. The actual growth in 2017 is likely to fall below

6.5%. The actual economic growth over the years has not shown a stabilization in the slowdown described in the

government work report. 2016’s actual growth rate declined less than the previous two years, but did not form a

narrowing trend, not even form a trend of stabilization in the slowdown. China’s economic growth has dropped

significantly below 10% since 2011, gradually far from about 10% high-speed growth miracle made in the past 10

years. This is neither our active choice, nor our ideal goal. Some people say that current low growth is better than

the fast growth in previous years as it’s more reasonable in the structure, and higher-efficiency. However, there is

no evidence to prove this argument. Now the economic growth goes down year after year, and the residents’

disposable income, business income and government revenue falls sharply in the growth, even below the GDP

growth, resulting in irrational structural increase, as well as a variety of new contradictions that continue deepen.

China’s economy slows down again and again, which can’t but say to be an unavoidable adverse change. In this

regard, we must face difficulties and pay attention to avoid making mistakes. The government work report correctly

put forward steady progress to make actual growth better and higher than the growth target.

The government work report directly pointed out the problem that the economic downward pressure was still

increasing, that was to say, the trend in slowdown of the economic growth was still going. From the actual situation,

in the past few years, China’s economic growth did not stabilize, or even formed a stable-to-better trend. The

government report mentioned that there are stable growth forces in the economy, such as consumption-driven

growth, increase in the proportion of service industries, upgrading of traditional industries, rapid growth of new

industries and enhancement of innovation and development of new industries. However, these steady growth forces

can’t resist more powerful and growing economic downward pressure, resulting in that the actual economic growth

continues to slow down. Since 2013, the economic growth target has been turned down year after year, and after

that drawback, the growth target has touched the bottom line lower than ever. However, the bottom line is still

falling. where is the problem?

The government work report pointed out that the current growth of China’s economic growth is insufficient. In

2016 the growth rate of private investment and manufacturing investment with the strongest endogenous driving

force fell sharply. The private investment growth fell from over 20% in 2014, over 10% in 2015 to 3.2% in 2016.

The manufacturing investment growth fell from over 18% in 2013, over 8% in 2015 to 4.2% in 2016. In the second

half of 2016, the monthly growth rate of private investment and manufacturing investment rebounded slightly from

2% in the middle year, still far below the normal level, without a sign of strong recovery. Affected by the market,

policy and resource allocation, private enterprises hesitated to make investment expansion and lacked of vitality

and even bankrupted. This phenomenon exposed deep issue of economic slowdown due to lack of endogenous

power. Over the years the overall profitability of private enterprises was better than state-owned enterprises. In the

first half of 2016, private enterprises’ profit grew by 8.8%, significantly higher than the state-owned enterprises’

profit growth of -8%. Private enterprises decrease the investment under higher profitability not because of their lack

of investment expansion desire, but rather because of the financing difficulties, policy discrimination and other

adverse changes to suppress their investment activities. However, since the second half of 2016 private enterprises’

profitability has been declining. By the end of the year their profit growth rate was lower than the state-owned

enterprises. Private enterprises, used to have the strongest market vitality and being the fastest growing sector,

Center for China in the World Economy 22

declined sharply in their investment from the first half of this year, and suffered deteriorating business conditions in

the second half. It painfully presents a critical situation that China’s economic downturn pressure tends to expand.

Enterprise manufacturing investment has been squeezed by the government large-scale infrastructure

investment. Since 2013, infrastructure investment has accelerated to expand by more than 20% in the first half of

2016. The manufacturing investment in the same period has changed negatively, from over 25% in past years down

to less than 10% and even to 5%. The government-led large-scale infrastructure investment expansion tried to

vigorously play a stable and push up the role of economic growth. However, the infrastructure investment

expansion was too large and took too much investment and financing resources, so that business-oriented

manufacturing investment couldn’t be smooth in the expansion. Infrastructure investment expansion exceeded a

reasonable limit as the proportion of infrastructure investment, low in investment efficiency, with long-period and

slow return, rose too fast, which resulted in poor economic operation, slow capital turnover, and being obstacles

against structural adjustment transformation and upgrading. Manufacturing investment and its growth changed

from high-speed development into low-speed crawling, resulting in the overall economy was towed down.

The real economy of manufacturing industry is frustrated but the real estate asset bubble expanded crazily.

Since 2013, China’s economy has faced an overall downward pressure as the GDP growth continues to decline and,

manufacturing and other real economic difficulties aggravated, while the real estate market soared and housing

sales and prices rose sharply. In April 2016 the real estate market reached the peak, commercial housing sales and

first-tier cities housing prices rose as high as 54.1% and 31.5% respectively. Many people cheered this soaring as

the “sunny spring” of China’s economy, and a powerful force to support the Chinese economy to rebound. All the

real estate-related activities were increasingly rising with windfall profits into profits, including steel, coal and

cement to appear higher forward prices. PPI and related business profits changed from a substantial decline into a

substantial increase. The local land transfer revenue also created another peak. The GDP growth maintained 6.7%

for three successive quarters that didn’t happen in recent years. In the last quarter, the GDP rose slightly to 6.8%.

House prices rose far more than all industries and investment, saved the real estate investment speculation and local

financial crisis, making real estate investment speculation more excited, but just a “quench thirst” for China’s

economy. China’s economy slipped from “real” into “virtual” and turned into the dangerous road of virtual

economy expanding while real economy declining”. A large amount of bank loans and social capital flooded into a

real estate to promote real estate prices soaring. The real estate industry has become more and more bubble and

speculated. The current huge growth of real estate asset value and earnings is mainly due to unrealistic push-up by

the bank mortgage funds and market speculation funds. According to the National Bureau of Statistics data, in 2016,

the added value of the real estate industry increased by 8.6%, and the added value of enterprises of coal, iron ore

and iron and steel industry, which were closely related to real estate, increased by -1.5%, - 2.6% and 1.7%

respectively. The industries closely related to the real estate happened to surplus and overcapacity and continued

decline in physical output for many years as the actual growth rate was negative, which are the main factors to drag

down China’s economic growth. This round of housing prices rose sharply, and closely-related industrial earnings

soared to stimulate excess capacity, which would deepen the future negative growth and bring greater downturn

pressure for China’s economy. Real estate used a large amount of bank loans and social funds to push their own

prices, with the vicious growth of high profit, which ruthlessly blew the real economy. In 2016, the proportion of

real estate loans and real estate loans increased to 44.8% and 25%, up by 14% and 3% compared to the previous

year. Of all real estate loans, new personal purchase loans and personal purchase loans balance accounted for 87.5%

and 71.7%, up by 13% and 4% over the previous year. The proportion of bank loans flowing to real estate rapidly

rose, and social funds were more ferocious. A large amount of bank loans and social financing flooded to real estate,

not as the central bank official saying that bank loans flowed into relevant industries through real estate, driving a

Center for China in the World Economy 23

broader industrial and overall economic growth, but rather a flood of bank loans boosted house prices, and then real

estate related industries and activities through rising housing prices to obtain monetary income and book wealth in

violent growth. Physical and real economy had essentially no substantial growth or even shrinkage. I investigated a

small enterprise producing household doors and windows accessories in Beijing, and found that its product market

sales started to seriously reduce due to the decline in real estate construction. The operating costs increased

significantly increased due to rising house prices rents and wages. The entrepreneurs worried to survive even with

the advantages of technology for products manufacturing and sighed to escape from the manufacturing industry

into the more profitable real estate industry. The National Bureau of Statistics announced that in 2016 the real estate

industry used 14.4 trillion RMB, up by15.2% over the previous year. 70 large and medium cities housing prices

went up by 10.5% and first-tier cities rose by 27.1%. The added value of real estate actually increased by 8.6%.

Housing construction area, new construction area, completed area increased by 3.2%, 8.1%, and 6.1% respectively.

Real estate sales growth was higher than the real estate sales area growth. The nominal price of real estate was

higher than its actual growth of added-up value. Use of monetary loan and social financial capital in the real estate

industry rose higher than the actual growth of it. New funds used in the real estate accounted for 44.8%, much

higher than the actual value added value of real estate, which accounted for 8%. The growth rate of real estate

investment and construction activities was lower than most of the real manufacturing industries. The actual

contribution of real estate to the economy was far less than its occupation of the capital resources. Real estate

speculation activities relied on excessive funds to blow a large bubble and relied on gold medal game to seize the

wealth, and swept away private enterprises, manufacturing industry, and livelihood, resulting in that the real

economy lack of blood as not able to develop, and a fatal threat to the future growth of China’s economy.

The central economic work stressed that “the house is used to live, not to speculate”, firmly opposing to

speculation in the real estate. It put forward to strictly limit the flow of funds to invest speculative buyers, and use

financial, land, finance and other means to curb the real estate bubble, and to promote the smooth development of

the real estate market. However, the measures to curb real estate speculation real were carried out slowly. The

property tax could sharp thorn real estate speculators; however, it was vaguely replaced as legislation was dragged

on and on and not proposed at the National People’s Congress. Relevant departments said that bank loans would

continue to invest more in real estate and make real estate speculation more rampant, while the real economy more

weak. Finally it would form a greater threat to the China’s economy. China’s economy must keep sober-minded and

draw a lesson from a bitter experience. Only bitter medicine treatment, reluctantly quitting drug addiction, and

turning from the virtual to the real economy to suppress speculation in real estate speculation as well as to revitalize

the manufacturing industry can create a new situation with stabilization in slowdown and steady progress.

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Center for China in the World Economy 24

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