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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.

Growth eases, but momentum remains solid: Q4 summary

  • Regional GDP is expected to grow 6.7% this year, up slightly from 6.6% in 2016.
  • After a strong expansion in the first half of this year, China’s growth eased slightly in Q3. We project a cooling of growth through 2018 amid a less accommodative monetary policy.
  • The external environment remains broadly conducive, but we expect global demand to ease somewhat in the coming 6 months. 
  • Hong Kong’s economy continues to benefit from strong private consumption and solid export growth. But a possible correction of the overheated domestic property market remains the biggest risk.
  • Macau’s services sector recovery boosts prospects for economic growth. We expect the economy to expand 7% this year after shrinking by a cumulative 24% in 2014-16.
 

China enters the final quarter with solid growth momentum

GDP growth eased slightly to 6.8% in Q3, as exports and investment lost pace, although consumption growth remained relatively stable. However, industrial production, exports, fixed asset investment and retail sales ended Q3 on a positive note, with growth picking up somewhat in September, after a slowdown in the previous two months, indicating solid momentum going into Q4.

Looking forward, we expect global demand to ease somewhat in the coming 6 months, amid cooling import growth in Asia, which should more than offset any improvements in demand growth from the US and Europe. Downside risks remain, in particular in the area of US-China trade relations following a surge in Chinese exports to the US since early-2017, which has widened US-China trade deficit to US$198bn in the first nine months of 2017 (up 7% y/y).

Meanwhile, we expect domestic demand growth to continue to ease in Q4 and 2018, amid a gradually less accommodative monetary policy stance, reflected in an easing of credit growth. The prospect of less easy monetary policy is leading to upward pressures on interbank interest rates. But we do not expect higher benchmark interest rates, given the subdued inflation outlook.

Specifically, we forecast real estate activity to cool further. The ongoing housing purchase restrictions in many large cities will continue to weigh on housing sales growth, which in September fell for the first time since March 2015 (albeit from a high base a year ago). Housing starts growth also slowed notably to 4.8% y/y in Q3 from 14.9% y/y in H1. While we expect corporate investment to remain subdued, infrastructure investment should remain solid, amid a senior official reshuffle. We also expect consumption growth to ease on moderating real wage growth, but to remain relatively resilient and stable.

While policymakers have started to rein in financial risks, the tightening of macro stance is gradual and moderate. We estimate that the target for overall credit growth this year – measured by Total Social Financing (TSF) – is 13.8%, compared to 16.1% in 2016, and recent trends show that overall credit growth is easing only slowly towards that targeted pace. Looking further ahead, we expect credit to continue to outrun nominal activity in the coming years.

China’s leadership focuses on the long term

President Xi delivered a key policy speech at the 19th Party Plenum on October 18, outlining his vision for China’s development through 2050. As we expected, his speech did not herald a material change in the economic policy stance in the short and medium term.

While committing to cement China’s existing system – “Socialism with Chinese characteristics” – President Xi identified key long-term challenges in the coming decades as squaring “uneven and inadequate development” with “people’s ever-growing demand for a better life”. He laid out the implications for economic policy: the need for more emphasis on quality and equality as opposed to quantity.

We think that in the coming 10 years these quality and equality aspects will drive economic policy reform in the fiscal area – further improving access to health, education and pension provision – and increased efforts to improve China’s environment and ecology.

Notwithstanding the absence of new long-term growth targets, there are no indications that the goal of doubling 2010 GDP by 2020 has been abandoned. We maintain our forecast of 6.8% for 2017, but expect a somewhat lower growth target in 2018. On current trends China only needs to grow by 6.3% pa in the coming three years to meet its 2020 target. We have raised our 2018 forecast to 6.4% (from 6.2%) and assume a more modest slowdown in 2019-20.

Xi committed to further reforms of state-owned companies (SOEs) by means of changes in shareholding structures and M&A and we expect efforts to improve “operational efficiency”. Moreover, a stronger push to reduce pollution is likely to accelerate cuts to capacity and production in heavy industry, where drastic reductions are needed by state-owned industrial firms. However, progress towards higher efficiency and profitability of SOEs will remain constrained by objectives such as creating national or international champions and strengthening the role of the Communist Party in SOEs.

Hong Kong and Macau outlook

Hong Kong’s economy maintained a healthy pace in the second half of this year. The recent improvement in consumer sentiment and the buoyant stock market have been supporting private consumption. External demand also gathered pace amid the robust trade performance in the wider region. However, Hong Kong’s export trends will likely decelerate towards the end of this year and into next year as we expect a gradual slowdown in global demand, particularly demand from the Mainland. Looking ahead, we expect housing constructions and infrastructure projects to support investment growth well beyond next year. The new government is also committed to a more expansionary fiscal stance over this 5-year term. Meanwhile, a possible correction of the overheated domestic property market remains the biggest risk, and we expect slow property price inflation in 2018 to weigh on consumption sentiment. We forecast GDP to grow by 3.6% this year and 2.5% in 2018.

In Macau, the recovery in the services sector continued apace in Q3, despite the disruptions of severe typhoons which wreaked havoc on the gambling hub in late August. Gross gaming revenue posted a double digit growth for the eighth month in a row in September, underpinned by a resurgent VIP market and ongoing efforts to lure mass market players via new resort opening. That said, momentum is easing and the outlook still bodes uncertainties amid tighter monetary policy and efforts to contain capital outflows on the Mainland. Overall, we expect the economy to grow by 7% on average this year after shrinking by a cumulative 24% in 2014-16. But we project a slower growth of 3.6% for 2018, mainly due to lower external demand (especially on the Mainland).

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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