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Economic Insight: Greater China

ICAEW Economic Insight: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.

Solid growth continued, but cooling ahead: Q1 summary

  • A solid Q4 brought overall GDP growth in the region to 6.8% in 2017, up from 6.6% in 2016. This first pick-up in growth since 2010 was driven by stronger net external trade.
  • We forecast a modest slowdown this year to 6.3%, with China’s GDP growth easing to 6.4% (from 6.9% in 2017) on tighter monetary and financial policies.
  • We forecast Hong Kong’s GDP growth to slow from 3.8% in 2017 to slightly above 3% this year, as domestic demand momentum will likely lose some steam on slower property price growth and higher interest rates.
  • Macau’s GDP growth accelerated to 9.1% in 2017, underpinned by the ongoing recovery in the services sector and after shrinking by a cumulative 24% in 2014-16.

China’s economy to cool in 2018, but full-blown trade war unlikely

Real GDP growth held up at 6.8% y/y in Q4, owing to steady export momentum and robust household consumption. This brought GDP growth for 2017 as a whole to 6.9%, up from 6.7% in 2016 – the first annual acceleration in growth since 2010.

Strong goods exports and imports in January indicate healthy external and domestic demand momentum. While we expect the external setting to remain favorable in 2018, trade friction with the US is set to rise.

Following US tariffs on solar panels and washing machines in January, we expect the US administration to scale up on measures impeding imports, especially from China, as well as targeting the country in other ways. That said, while risks of escalation exist, we expect China to remain relatively restrained in its response and, as a result, overall economic damage to stay contained. Domestically, investment momentum remained subdued towards the end of 2017 and this trend is likely to continue in 2018, given the efforts to rein in capacity in heavy industry and slower real estate activity amid tighter monetary and financial policy

Meanwhile, household consumption has been outpacing investment by an increasingly large margin, pointing to continued economic rebalancing (Chart 2). In 2018, we expect consumption growth to remain solid amid robust wage growth and significantly outpace investment.

Overall, we expect real GDP growth to ease to 6.4% this year, after 6.9% in 2017. The key domestic risks stem from a more pronounced-than-expected impact of the planned financial tightening and slower real estate activity. But it is also possible that better real estate sentiment sustains property activity momentum more than we expect.

Risk prevention, stability and quality top policy agenda

The December Central Economic Work Conference (CEWC) identified financial risk prevention, poverty alleviation and pollution control as the top economic priorities for the next three years. But it also confirmed that China will continue to “seek progress while maintaining stability”, ruling out major policy shifts in 2018.

China’s policymakers remain focused on reining in financial risks and deleveraging parts of the financial system. Following financial tightening in 2017, they are preparing additional steps, notably with regard to asset management products (AMPs) and lending to non-bank financial institutions. However, we expect policymakers to take a cautious approach to financial tightening and do not expect it to cause a substantial economic slowdown, as policymakers are keen to reduce overall credit growth only gradually. We expect it to ease by 1 ppt to around 12.5% by end-2018.

In the medium and longer term, a change in policy direction

As heralded during the 19th Congress of October 2017 and re-affirmed by senior leaders and policymakers since then, in terms of longer-term development, the emphasis is meant to shift from “quantity to quality and equality”. Although growth will continue to be a key objective even in the long run, somewhat less emphasis on speed increases the room for reforms towards more balanced and sustainable growth.

We expect the increased focus on “quality” to shape fiscal policy in the coming decades, with further increases in spending in areas such as health, education and pension provision. Also, structural reforms and industrial policy will be shaped by more emphasis on innovation, “made in China 2025” and moving up the value chain, as well as on the environment and ecology.
China’s commitment to cement “Socialism with Chinese characteristics” – with a strong role for SOEs in the economy, their adherence to Communist Party leadership and, thus, a close link between the state and business – complicates its integration in the global economy. That is because the rules that govern the current international trading and investment system are based on a separation between states and the corporate sector. 

Rapid growth and change in consumer market to continue

Although China still has a long way to go in re-balancing its economy, it has become the world’s second-largest consumer market (after the US) and we estimate that its contribution to global consumption growth rose from 7% in 2000 to 26% in 2017, with last year’s figure equal to the contribution of the US. With China’s consumption set to continue to significantly outpace that of the US and the global average, we expect China to become the world largest consumer market by 2034. Also, we project China will contribute 44% to global consumption growth by 2040; this will be 3.5 times more than what we expect the US to contribute then (Chart 3). 

 

Three major consumption trends are key: (i) rising demand for discretionary items; (ii) consumption of services outpacing that of goods; and (iii) wider adoption of digital technologies. These key trends have been and, will continue to be a prominent force in driving the transformation of the country’s consumer market, pointing to sectors with particularly strong growth potential.

Hong Kong and Macau outlook

In Hong Kong, real GDP grew 3.8% in 2017, the fastest pace in six years. Domestic demand has been solid in the second half. The tight labour market and the buoyant property and stock markets have been supporting private consumption. Indeed, the unemployment rate fell to 2.9% in December, the lowest in 20 years. The revival of inbound tourism has helped retail sales to stage a meaningful rebound, while goods exports has been underpinned by solid global trade growth. Looking ahead, we expect the strength in domestic demand to carry into the early part of 2018 in spite of the stock market volatility seen in February. Robust construction activities and the expected increase in fiscal spending will also support growth this year. However, domestic growth momentum could gradually lose steam as property price growth will likely slow over the course of the year and domestic interest rates to rise further. Meanwhile, export growth will likely moderate on a cooling in Chinese import demand, and the risk of more forceful US trade restrictions on Chinese exports could hit Hong Kong’s export sector. In all, we forecast GDP to grow slightly above 3% this year, slower than the 3.8% in 2017.

Macau’s economy ended 2017 on a high note, with GDP growth rising 8% in Q4 and 9.1% for 2017 as a whole. Growth was underpinned by the ongoing recovery in the tourism and gaming industries. We expect the gaming sector to continue to grow this year, but at a much slower pace than that seen in 2017. Domestic demand, especially public investment is likely to gather momentum with the government promising to strengthen infrastructure construction to enhance its disaster prevention and relief work. Following the strong expansion in 2017, we expect GDP growth to ease to around 5% this year, as China’s demand is set to slow on tighter financial policy and local property market development remains a key risk amid tougher mortgage rules.

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.

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