Capital Group Financial Advisor Tokyo Japan - Where Is China’s Economy Headed In 2017?

Key Takeaways

China’s economy can sustain its momentum through June, supported by government stimulus, infrastructure projects and housing development
Demand for commodities and construction equipment should be supported by credit growth.

The Chinese renminbi will likely further depreciate against the U.S. dollar amid external pressures.

The list of problems that China faces is not short. Its economy isn’t growing as fast as it once was, monetary authorities are battling capital flight, debt is mounting and the new U.S. president is talking tough on trade. Here is how I see things shaping up for China in 2017.

Stimulus Effects Still Feeding Through the Economy

I am more optimistic than most about the direction of the Chinese economy. The consensus view is that China’s economy will lose momentum in the first quarter of this year as the red-hot housing market cools and government stimulus wears off. There is also the risk of tense trade relations with the U.S.

That said, in my view China’s economy can continue to grow along its current trajectory in the first half of the year, which is 6.5% according to official government figures.

Here’s why: There are enough new investment projects in the pipeline to support economic growth during the first half of 2017. Construction firms, for instance, reported order growth of greater than 30% during the first nine months of 2016. This included a mix of big and small projects, ranging from real estate to infrastructure manufacturing. The good news is projects tend to last two to four years. And by my count, this activity marks the greatest acceleration in new project starts since 2009. This should be supportive for commodity prices and global mining companies through the first half of 2017.

There is a lot of skepticism out there right now about private sector capital expenditures, too — but there are early signs cape is recovering, with real interest rates down and some sectors showing obvious capacity shortages.

To be sure, I do expect growth to slow in the second half of this year, especially with mortgage credit slowing and home sales having flattened.

Pockets of Strength in the Housing Market

There is a lot of bearishness about China’s housing sector.

Home sales skyrocketed in 2016, as did prices, with approximately US$1.4 trillion in new housing sold. Worried about a property bubble, government authorities are curbing incentives and rolling out buying restrictions as well as stricter lending requirements in some larger markets.

This is certainly impacting activity in China’s 30 largest cities, where sales fell 20% year on year in November. The market’s expectation now is that new housing starts will fall, denting gross domestic product growth and demand for commodities such as iron ore, copper and cement.

I agree that sales will slow, but not to the degree that most suspect.

Outside of the 30 largest cities, sales remain stronger due to affordability and the absence of government purchase restrictions. Immigration into smaller cities from surrounding rural areas will continue, pushing up the urbanization ratio from its current 55% level to nearer 70% to 80% over the next two decades. A lot of urban households want to upgrade their apartments, too. Interest rates also remain low, which should continue to support sales across most markets.

Furthermore, we have moved past the horror stories of ghost cities. Inventories continue to shrink nationally and housing stock in the bigger cities is at pre-glut levels. Inventories remain high in many smaller cities, though, so this is still a challenge.

Along those lines, new housing starts should continue to grow for the next three to six months, I think. Historically, housing accounts for twice the commodities demand of infrastructure, so I am watching this closely. While cautious, developers appear to be building more again.

Posted 8 Years Ago