China’s 2017 Economic Prospects

Last year marked the beginning of China’s 13th Five-Year Plan （2016-2020）. Amidst domestic worries in various sectors， the Chinese economy made a solid start and continued to contribute positively to world economic growth. In 2017， China will face even more complicated and faster-changing domestic and international situations， with increasing uncertainty. Against this backdrop， whether China can maintain its comparatively high economic growth rate of more than 6.5 percent has become a question of global interest.

2016 Economic Performance

To address the serious issues and domestic problems plaguing China’s economy， the government adapted to the new normal of economic development in 2016， committed to a new innovative， coordinated， green， open and shared development model， and pushed supply-side structural reform to successfully meet major projected goals for economic growth and set a solid foundation for accomplishing the building of a moderately prosperous society in all respects.

The economy operated within an appropriate range， as manifested in “four stabilities and one decline.” The first stability was growth. China’s GDP growth rate in the first three quarters of 2016 averaged 6.7 percent， as did the projected annual growth rate. The figure landed right in the middle of the economic goal of 6.5 to 7 percent set in early 2016， indicating that China’s economy will now grow in an L-shaped path. The second stability was employment. The first three quarters of 2016 witnessed the creation of 10.67 million urban jobs， which met the annual goal of 10 million ahead of schedule. This figure was expected to surpass 13 million by the end of 2016. The third was stability of commodities prices. In 2016， China’s commodities prices rose around the start and end of the year， but stayed low at other times. The Consumer Price Index （CPI） from January to November increased 2.2 percent on a year-on-year basis， lower than the control objective of 3 percent. The fourth was the stability in consumption. The country’s total retail sales of consumer products from January to November 2016 increased 10.4 percent year-on-year， slightly lower than the growth rate of the same period in 2015. China has become the world’s second-largest consumer market and facilitates the greatest total volume of e-commerce in the world. The one decline refers to both exports and imports. From January to November 2016， China’s total volume of imports and exports dropped 1.2 percent year-onyear， with exports falling by 1.8 percent and imports by 0.3 percent. The drop tended to narrow month by month.

Economic quality and efficacy improved， as well as corporate performance. From January to November in 2016， the added value of industrial enterprises above a designated size increased by 6.2 percent on a year-on-year basis. The coal industry saw profits double in 2016. The iron and steel industry reaped profits of more than 30 billion yuan in 2016 after a deficit of over 50 billion yuan in 2015. In September 2016， the Producer Price Index for Industrial Products （PPI） turned positive and has since increased month by month， reaching 3.3 percent in November. With PPI turning positive for the first time in 54 months， the Chinese economy has avoided deflation.

The economic structure has been upgraded. Since 2010， the growth rate of China’s service sector has surpassed that of industry. In 2013， the service sector’s share of China’s national economy first surpassed that of the secondary industry， promoting the transformation of the economic structure from investment and exportdriven to consumption-driven， and of the industrial structure from industry-dominated to service-sector-dominated. In the first three quarters of 2016， final consumption contributed 71 percent of economic growth， up 13.3 percent over the same period of 2015. After structural adjustment， the proportions of the three industries in relation to the total economy are 8.5， 39 and 51.5， respectively.

The pace of change of economic growth engines is accelerating. In 2016， traditional industries， including iron and steel， coal， nonferrous metal， building materials and petrochemicals， continued to see declining growth rates. Emerging industries such as high-end equipment， robotics， energy conservation， environmental protection， new energy automobiles， and new internet operational models and service industries such as healthcare， senior care， tourism， culture and sports are developing at breakneck speed. In the first three quarters of 2016， the added value of strategic emerging industries as well as new and high technology industries increased by more than 10 percent， four percentage points higher than the industrial growth rate. More than 4 million enterprises were registered in the first three quarters of 2016， an increase of 27 percent on a year-on-year basis. The majority of these enterprises are in service industries such as data delivery， software， information services， finance， culture， sports， entertainment， education， health， and social work.

China’s Economic Outlook for 2017

In 2017， the international environment and its relation to China’s economy are bound to become more complicated as uncertainty increases. The most glaring uncertainty lies with foreign and domestic policy adjustments to come from U.S. President-elect Donald Trump after he formally takes office. Actually， Trump’s policy adjustments present both pros and cons for China. On the positive side， Trump promised to increase infrastructure investment and cut taxes during his campaign， which will increase U.S. demand， stimulate investment， and promote imports， further stimulating the economic growth of the U.S. and the world while improving China’s environment for international demand.

Although the Chinese economy is facing challenges and risks domestically， its comparatively high growth rate creates many advantages. First， China’s deepened reforms will create a more favorable environment for entrepreneurship and innovation， releasing the reform dividend. Second， China’s further implementation of the Belt and Road Initiative will promote a heavier volume of imports at advanced levels as well as exports through various channels， re-shaping the opening-up dividend. Third， the comprehensive implementation of China’s innovation-driven development strategy will kindle enthusiasm from the world’s largest group of engineers and university students， cultivating a new professional dividend. Fourth， the implementation of regional development strategies such as the Beijing-Tianjin-Hebei integration initiative and the Yangtze River Economic Belt initiative will reinforce cooperation between more developed and less developed areas in China， building up the regional development dividend. Fifth， progress in new urbanization will effectively enhance the labor productivity of around 100 million people with rural household registration living in China’s urban areas， enlarging the urbanization dividend. Based on the five dividends， the Chinese economy will maintain comparatively high growth in 2017 with an expected rate of 6.5 percent or greater.

Promoting supply-side structural reform is a key point in China’s 13th Five-Year Plan. The new year will bring deepened supply-side structural reform. The 2016 Central Economic Work Conference， which concluded in December， mandated deep supplyside structural reform in 2017， which means that reform will be further intensified in the coming year.

In terms of solving overcapacity， China has already issued two general documents on the steel and coal industries， and eight supporting documents on rewards and subsidies， taxation， finance， employee resettlement， land resources， environmental protection， quality， and security. The key work for 2017 remains policy implementation， especially employee resettlement.

In terms of reducing the number of unsold homes， instead of relying on administrative measures and rapidly changing regulatory policies as in 2016， in 2017， China will focus on exploring a long-term mechanism to boost the healthy development of the real estate industry.

In terms of reducing leverage， China will transform banks’non-performing loans to enterprises into equity held by asset management institutions through debt-for-equity swaps.

In terms of reducing costs， China will improve its practice of replacing business tax with value-added tax （VAT） and at the same time further reduce taxes and fees， especially reducing the VAT rate on the manufacturing industry.

In terms of improving weak links， China will increase its investment in agriculture， poverty alleviation， improving public livelihood， ecological protection and innovation in 2017.

In terms of the country’s macroeconomic policy in 2017， China will continue to adhere to a proactive fiscal policy and a prudent monetary policy， but with different intensity. Fiscal policy will be even more proactive. The Chinese government will raise spending by increasing its budget deficit， but at the same time reduce the cost of the real economy and promote upgrades to the industrial structure through structural tax cuts. China’s monetary policy will remain prudent and neutral in 2017. Since expectations about the country’s inflation in 2017 are on the rise， the country’s broad measure of money supply （M2） needs to avoid being too loose or too tight to keep commodity prices within a reasonable range. It is expected that the M2 growth rate in China will stay at 12 percent in 2017， the same as 2016. Prudent monetary policy fosters stable exchange rates， and the Chinese government will keep the RMB stable in 2017 to maintain the balance of increased exports and capital flow.