- 2018-10-17
Top Ten Forecasts of China's Economy in 2017
In the past few years, China has made too many wrong investments. These huge investments helped to maintain the economic growth rate of the year, but they led to a continuous decline in the rate of return on investment, planting the root cause of today's lack of domestic demand. Based on this, our quantitative forecasting model puts forward the top ten forecasts for 2017 as follows.
China's economic rebound?
will not. In the second half of 2016, China's economic data showed improvement, and the main driving force came from the super-large-scale fiscal stimulus, the real estate boom and the inventory replenishment movement. Under 52-month-long negative PPI pressure, the upstream industry has insufficient investment and the supply chain is in a tightly balanced state. Under the guidance of the policy of limiting output (rather than reducing capacity), a de facto price trust has been formed, and the efforts to replenish inventory have been strengthened. The resulting recovery of profits in upstream industries (with a relatively high proportion of state-owned enterprises) has improved the surface data, but in essence it is only the reallocation of profits in different industries and enterprises with different ownerships, which in fact further suppresses the profit expectations of manufacturing and private enterprises And investment motivation. This re-allocation is also supported by local hot industries such as real estate and automobiles. With the lack of momentum in local hot industries in 2017, real estate investment and manufacturing investment in investment will encounter downward pressure, and infrastructure investment will not be enough to make up for the former two. Decline. Under the threat of weak terminal demand and stagflation, restocking may die prematurely. Exports continue to grow negatively. In this way, according to our model's forecast, China's GDP growth rate in 2017 will further decline to about 6.4%.
The RMB stabilizes?
will not. The renminbi depreciation logic believes that the decline in the return on investment in renminbi assets is the real reason, which determines that the renminbi depreciation will be a long-term trend. But this is not equivalent to a straight depreciation of the renminbi. In 2017, with the US dollar's transition and volatility, the RMB exchange rate against the US dollar may fluctuate significantly. However, in the end, the RMB exchange rate against the US dollar may still depreciate to the line of 7.2 to 7.3 in 2017, with a depreciation rate of about 5%.
Is inflation rising again?
will not. The general domestic seller model looks at inflation and will attach importance to the promotion of CPI by food and even pork, which is not profound enough. On the surface, based on the high linkage between CPI and pork and the high volatility of pork prices, this analysis seems reasonable, but in fact, the hidden logic behind it lies in: 1) The rise in low-end labor costs caused by other factors will promote Food prices rise; 2) labor productivity growth will affect the ratio of cost rises to price rises; 3) changes in supplier inventory decisions caused by price rise expectations. These three links reveal that the real driving force of inflation lies in the contradiction between rising terminal demand and stagnant labor productivity, which pushes up prices, and is amplified by the inventory increase decision. The simultaneous changes in pork and food prices are this. A by-product of logic. In this regard, tracking inflation to pork does not complete the analysis task and cannot correctly grasp the future. According to our model analysis, terminal demand will remain weak in 2017, unemployment pressure will intensify, wage growth will slow, and inflation will not have the basis for a sustained high. It is very likely that around the Spring Festival, China's inflationary pressure will weaken, and then it will fluctuate downward. The average value for the whole year will be below 1.8%.
Is the turning point of liquidity coming?
Will do. Two major trends will run through 2017 and lead to a decrease in liquidity. First of all, market-based interest rates such as the yields of treasury bonds will continue to rise. Under the pressure of the renminbi exchange rate, the yields of Chinese government bonds need to maintain a certain spread with the yields of U.S. Treasuries in order to reduce the pressure of further capital outflows. In fact, after 2012, the spreads between China and the United States have been maintained at a very high level. Within a tight range, the U.S. Treasury bond yields are likely to continue to rise in 2017, adding to the pressure of rising market-based interest rates in China. On the other hand, in the face of exchange rate pressure, asset bubbles, and insufficient financing demand in the real economy, the central bank will have to implement a tighter policy. Institutions may reduce leverage throughout the year, which will also have an impact on interest rates. Second, the credit demand of the real economy may continue to decrease. The main contributor to credit demand in 2016-household mortgages-will be reduced, and the gap cannot be offset by manufacturing and infrastructure credit. The increase in interest rates and the reduction in credit creation, the result of the two combined forces, is the end of China's liquidity feast. In place of the shortage of assets, the shortage of funds will be paid more and more attention, and the competitive disadvantages of small banks and other institutions will become more prominent.
Increased debt defaults?
Will do. Although the upstream industries and many state-owned enterprises won profit inflection points through the increase in commodity prices in 2016, and reduced the pressure of debt default in these areas, this pressure has not disappeared, but has shifted to other areas. In a fundamental sense, China’s return on assets did not substantially improve in 2016. What we have observed is the redistribution of profits among different industries: upstream reaps profits from downstream industries through high prices. In an environment where interest rates are rising, financial institutions are reducing leverage, and liquidity is reversing, the balance sheets of a large number of uncompetitive zombie companies will continue to deteriorate and translate into higher debt default rates.
Further expansion of the fiscal deficit?
Will do. In the context of the slowdown of private enterprise investment, manufacturing investment and real estate investment, the government will find itself to bear greater obligations. Whether it is to expand infrastructure or meet people's livelihood, it will require continuous and rapid expansion of government spending. According to our model predictions, fiscal expenditure growth in 2017 may not be lower than 2016. At the same time, under the pressure of lower domestic demand and slower growth, especially the poor prospects of several major tax items, the growth rate of fiscal revenue may continue to drop to single digits. The fiscal deficit-even if defined by the government's narrowest caliber-will exceed the 3% red line. The issuance of treasury bonds will accelerate, which will also constitute one of the factors that oppress the rise in yields of treasury bonds.