Political transitions on both sides of the Pacific will figure heavily in China’s efforts to keep its economy on track in 2017. Uncertainty over what U.S. President-elect Donald Trump will do with trade policy once he takes office is overshadowing the outlook for China and the rest of Asia in myriad ways. At the same time, China has its own politics to consider: With the once-in-five years Communist Party Congress coming next fall, the leadership in Beijing will be hell-bent on keeping growth on an even keel.
President Xi Jinping looks set to stay on for a second term, but five of the seven members of the powerful Politburo standing committee are due to retire. “The Party Congress and the Trump issue are two big question marks for the Chinese economy in 2017,” says Franklin Allen, a professor of finance and economics at Imperial College in London and an emeritus professor of finance at Wharton. For now, that means maneuvering for short-term gain, not tackling big problems like state enterprise reform, he says. “I do not think Chinese government will do a lot of reform ahead of the Party Congress in fall in 2017 because they need stability in the economy.”
The latest data suggest that China has once again fended off a “hard landing,” at least for now. Trump’s unorthodox stances on trade and his antagonistic comments about Beijing are an unwelcome distraction for Chinese planners trying to fine-tune policy to keep growth from faltering while at the same time reducing risks of excess speculative investment in the property sector, says Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong.
Official GDP data are due out later in January, but Kuijs says strength in the real estate sector was a big factor behind a revision in his growth estimate, to 6.7% for the year, up from an earlier forecast for 6.5% growth. This year, economists expect the economy to cool slightly, expanding by 6.3% to 6.4% as the government strives to prevent a speculative bubble from getting out of hand. Staunching outflows of capital and keeping the yuan’s exchange rate stable, and curbing excess capacity in major industries such as steel making and aluminum, are other sometimes conflicting priorities.
“The Party Congress and the Trump issue are two big question marks for the Chinese economy in 2017.” –Franklin Allen
Though the one-party ruled country’s political system differs greatly from western democracies, 2017 is the rough equivalent of an election year, and that means the government will be loath to cut spending or impose significant job cuts ahead of the party congress, says Kuijs. “They want to have pretty stable economic growth, so they are unlikely to rein in credit growth before that event.” The report from the annual Central Economic Work Conference, which ended on December 16, showed a slight change in tone regarding key economic objectives and policy direction for 2017: Instead of emphasizing “development” the call was for stability, Kuijs notes.
Politics still play a leading role in China, and factional infighting remains a potential wild card that could further hobble needed reforms and also hinder efforts to prevent big outflows of capital, analysts say. “I would put politics as the number-one risk in China in 2017,” said Chi Lo, a senior economist of BNP Paribas Investment Partners in Hong Kong and author of several books on China. It is unclear who will be replacing whom in the leadership lineup and who will be managing what portfolios, he explains. “If the leadership transition is not certain, economic structural reform is uncertain. This affects Chinese confidence. As long as the uncertainties linger, the Chinese will take their capital out of China whenever they have a chance. So the capital outflow will remain a big risk for 2017.”
The Trump Factor
And then there’s Trump, who has threatened to impose up to 45% tariffs on Chinese exports to the U.S. and has chosen hardliners on trade for many of his cabinet and advisory posts. Some analysts doubt Trump will go so far as to impose blanket tariffs on goods made in China, and customarily, U.S. presidents-elect talk tough on trade and the economy but tend to settle for a more realistic approach once they are in office.
“Trump is a businessman, so he is not likely to do something drastic,” says Yasuo Sone, a professor of economics and director of the Center for China and Asian Studies at Nihon University in Tokyo. Implementing 45% tariffs on Chinese products imported into the U.S. would make those products far more expensive, hurting American businesses. “[Trump] will be more realistic toward China once he becomes president,” Sone says: He could impose punitive tariffs on specific products on a case-by-case basis instead of slapping a 45% tariff rate on all imports from China as he threatened in his campaign rhetoric. There is a precedent for this: President Barack Obama imposed a 35% import tariff on Chinese tires in 2009, Lo notes.
The easiest way Trump could hit back at China would be to officially label it a “currency manipulator.” Over many years, U.S. officials maintained that the Chinese yuan, which is not fully convertible, was being kept too cheap against the dollar, giving Chinese exporters an unfair exchange rate advantage. The U.S. Treasury can declare Beijing a manipulator without Congressional clearance. Taking such an action, even though China actually now is struggling to keep its currency from falling too far or too fast against the rising U.S. dollar, could enable Trump to trigger a series of trade restrictions under the 2015 Trade Facilitation and Trade Enforcement Act against China. “[It] may well be his first move in addressing his criticism on China,” says Lo.
Even before he takes office, the Trump factor is already complicating matters: China’s foreign exchange reserves declined by US$41 billion in December 2016 to US$3.01 trillion, the sixth straight monthly decline, following a US$69.1 billion drop in November 2016. Rising U.S. treasury yields and a stronger U.S. dollar after the November 8 election are drawing in capital from emerging market investors seeking those higher returns. China’s foreign exchange reserves are at their lowest level since March 2011, having declined by US$982 billion from a peak of US$3.99 trillion in June 2014. China still has the highest foreign exchange reserves in the world.
“I would put politics as the number-one risk in China in 2017.” –Chi Lo
“From a policy point of view, China does not want the yuan to fall much further, but whether [the government] can do much about it is another question,” says Rajiv Biswas, a Singapore-based Asia-Pacific chief economist at IHS Global Insight says. Abrupt declines in the yuan, also known as the “renminbi,” or “people’s money,” such as the one that rocked world markets in August 2015, cause too much turmoil. “The Chinese government does not mind some further decline in the renminbi but the main issue is they do not want to be too quick. They do not want a panic but a controlled decline,” says Biswas, who is forecasting that the yuan’s value will drop to slightly over 7.00 yuan to the U.S. dollar by late 2017 and to 7.20 yuan by the end of 2018, from 6.9 yuan at the end