ICAEW Economic Insight: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.
Strong growth in the first half of the year emboldened policymakers to tighten the overall macro stance. They engineered higher market interest rates and tightened regulation on shadow banking and local government financing. These changes raised some concerns in the market about tighter monetary policy stifling economic growth. However, we think these are overstated.
The monetary conditions index (MCI) can act as a leading indicator and largely explain the variation in cyclical indicators such as housing starts. It shows that overall conditions have been broadly neutral since mid-2016, even though the credit component turned slightly negative since September last year. Based on our forecast for credit growth, interest rates and the exchange rate, we think that monetary conditions will remain broadly neutral for the rest of the year. This is consistent with slower economic momentum but there will not be a sharp deceleration in growth.
While we expect the People’s Bank of China to keep interbank rates relatively high, we do not expect a rise in benchmark rates this year as inflation is forecast to stay comfortably below the 3% target. Moreover, we estimate that the target for overall credit growth this year is 13.8%, compared to 16.1% in 2016, and recent trends show that overall credit growth is easing slowly towards that targeted pace. Looking further ahead, we expect credit to continue to outrun nominal activity in the coming years.
The 19th Plenum of China’s Communist Party, likely to be held in October, is a major political event. Many senior jobs will be reshuffled, including five of the seven seats on the Standing Committee of the Politburo. There is widespread consensus that, in the run up to the Plenum, China’s senior leadership just wants stability on all fronts and will not want to undertake significant changes in the economic and financial policy stance. While things cannot be taken for granted, signs are that President Xi Jinping will be quite successful in strengthening his position in terms of seeing his preferred candidates take on senior positions.
While economic policy will not feature prominently at the Plenum itself, many observers speculate that Xi’s position is strengthened following the event, while significant changes in economic policy will be introduced. Key questions are whether there will be greater willingness for potentially disruptive reforms and how to balance growth with reform and deleveraging.
We do not expect a major shift in the stance on these issues. In our view leaders will continue to put emphasis on stability and gradual rather than abrupt change. While there is interest in further reforms, we think that there is little appetite for steps that are economically or politically risky. Moreover, there are signs of a lack of consensus at the senior level on economic policy and reform, which further reduces the likelihood of rapid changes.
Hong Kong’s economy grew by 4% y/y in the first half of the year – its fastest expansion in six years. Growth was underpinned by robust domestic demand and a fairly healthy export performance. The acceleration in private consumption and investment spending in Q2 reflects improved confidence among domestic households and companies.This bodes well for solid demand momentum to continue in H2, provided the city’s buoyant asset prices, especially in the property market, do not experience sharp corrections.
Externally, we expect faster global trade to continue to support Hong Kong’s exports in the coming months, although their year on year growth may ease further in H2 as Chinese import demand moderates. Following the surprisingly positive Q2 outturn and reasonable outlook for domestic and external demand in H2, we now forecast that GDP will grow by 3.5% this year (up from 2% in 2016).
Macau’s economy grew by 10.9% in the first half of this year, after shrinking by a cumulative 24% in 2014-16. The recovery in the services sector gathered more momentum, driven by rising tourist arrivals which also sparked the city’s casino revival. Gross gaming revenues rebounded for the 12th consecutive month through July following 26 months of y/y declines, with VIP revenue growth overtaking the mass market in Q2 for the first time in nearly six years. While a resurgence in VIP gambling bodes well for short-term prospects, we remain cautious on how sustainable such growth momentum will last amid tighter monetary policy and capital controls on the Mainland. Domestically, we expect private consumption to sustain its recent momentum in H2 on a solid labour market and firming house prices. Overall, we forecast GDP growth to rebound to 7% this year.
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.