China Economic Forecast

China Economic Outlook

October 18, 2016

Data available for September suggest that the economy fared relatively well in Q3, though the positive impact of previous policy support has gradually faded. The PMI ended the quarter on a solid footing and retail sales were robust in August. On the downside, investment likely decelerated in Q3 and exports slowed sharply in September. In an attempt to cool their overheated real estate markets, more than 20 municipalities, particularly in top-tier cities, had introduced home purchase restrictions and higher mortgage down payments by the end of September. These initiatives come after two years of easing to support the property sector and threaten to add downward pressure on overall growth. On 11 October, the State Council unveiled plans to cut rising corporate debt, including encouraging mergers and acquisitions, swapping debt to equity and facilitating firms’ bankruptcy.

China Economy Data

Population (million)1,3471,3541,3611,3681,375
GDP per capita (USD)5,5756,2607,0377,5697,808
GDP (USD bn)7,5118,4769,57610,35210,736
Economic Growth (GDP, annual variation in %)
Consumption (annual variation in %)  
Investment (annual variation in %)24.020.619.615.710.0
Industrial Production (annual variation in %)13.910.
Retail Sales (annual variation in %)17.114.313.112.010.7
Unemployment Rate4.
Fiscal Balance (% of GDP)-1.1-1.6-1.9-1.8-3.5
Public Debt (% of GDP)14.914.514.815.0-  
Money (annual variation in %)13.613.813.612.213.3
Inflation Rate (CPI, annual variation in %, eop)
Inflation Rate (CPI, annual variation in %)
Inflation (PPI, annual variation in %)6.0-1.7-1.9-1.9-5.2
Policy Interest Rate (%)6.566.006.005.604.35
Stock Market (annual variation in %)-21.73.2-6.752.99.4
Exchange Rate (vs USD)
Exchange Rate (vs USD, aop)6.466.316.156.166.28
Current Account (% of GDP)
Current Account Balance (USD bn)136215148277331
Trade Balance (USD billion)154231258383602
Exports (USD billion)1,8982,0492,2092,3422,283
Imports (USD billion)1,7441,8191,9521,9591,681
Exports (annual variation in %)
Imports (annual variation in %)
International Reserves (USD)3,1813,3123,8213,8433,330
External Debt (% of GDP)

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China Economy Overview

Economic Overview

The Chinese economy experienced astonishing growth in the last few decades that catapulted the country to become the world's second largest economy. In 1978—when China started the program of economic reforms—the country ranked ninth in nominal gross domestic product (GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of USD 9.2 trillion.

Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of GDP. However, in recent years, China’s modernization propelled the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable 45.0% of the country’s total output. Meanwhile, the primary sector’s weight in GDP has shrunk dramatically since the country opened to the world.

China weathered the global economic crisis better than most other countries. In November 2008, the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an attempt to shield the country from the worst effects of the financial crisis. The massive stimulus program fuelled economic growth mostly through massive investment projects, which triggered concerns that the country could have been building up asset bubbles, overinvestment and excess capacity in some industries. Given the solid fiscal position of the government, the stimulus measures did not derail China’s public finances. The global downturn and the subsequent slowdown in demand did, however, severely affect the external sector and the current account surplus has continuously diminished since the financial crisis.

Apparently, China exited the financial crisis in good shape, with GDP growing above 9%, low inflation and a sound fiscal position. However, the policies implemented during the crisis to foster economic growth exacerbated the country’s macroeconomic imbalances. Particularly, the stimulus program bolstered investment, while households’ consumption remained repressed. In order to tackle these imbalances, the new administration of President Xi Jinping and Premier Li Keqiang started to unveil economic measures aimed at promoting a more balanced economic model at the expense of the once-sacred rapid economic growth.

Economic History

After Mao Zedong’s death in 1976, Deng Xiaoping—who was the core of the second generation of Chinese leadership—became China’s paramount leader and pushed ahead bold reforms that reshaped the country’s economy. At the Third Plenum of the 11th Central Committee of the Communist Party of China, held in December 1978, Deng announced the official launch of the Four Modernizations—agriculture, defense, industry and science and technology—which marked the beginning of the reform and opening-up policies. Economic reforms under Deng’s era increased the role of market mechanisms and reduced government control over the economy. The measures included, among others, breaking down the collective farms, opening up China to foreign investment, encouraging business entrepreneurship, establishing Special Economic Zones and introducing market incentives in the state-owned companies. Moreover, China started to participate in the global economy and the country joined the International Monetary Fund (IMF) and the World Bank in 1980.

In early 1990s, Jiang Zemin—the third generation of Chinese leadership—became the new paramount leader of the country and his administration implemented substantial economic reforms. Under his mandate, most of the state-owned companies, except large monopolies, were privatized or liquidated, thus expanding the role of the private sector in the economy at the cost of leaving millions unemployed. During the same period, President Jiang and Premier Zhu Rongji reduced trade barriers; ended state planning; introduced competition, deregulation and new taxes; reformed and bailed out the banking system; and drove the military stratum out of the economy. In addition, Jiang guided China to join the World Trade Organization in December 2001, which buttressed the country’s trade.

In 2002, Jiang Zemin stepped down as General Secretary of the Communist Party, thereby initialing the transition to the fourth generation of leadership, led by President Hu Jintao and Premier Wen Jiabao. The Hu-Wen administration tried to reduce the income gap between the coastal cities and the countryside, as China’s skyrocketing growth mostly benefited just one part of the population. They increased subsidies, scrapped agricultural taxes, slowed privatization of state assets and promoted social welfare. Despite the government’s efforts to prevent the country from overheating, by the mid-2000s the economy experienced an unprecedented economic growth mainly due to booming exports, resilient private consumption, soaring manufacturing and massive investment. However, the 2008 global financial crisis forced the Chinese authorities to launch an aggressive stimulus package and adopt a loose monetary policy.

The fifth generation came to power in 2012, when President Xi Jinping and Premier Li Keqiang took the reins of the country. The new Xi-Li administration unveiled an ambitious reform agenda in an attempt to change the country’s economic fundamentals and ensure a sustainable growth model. In this regard, authorities expressed their willingness to tolerate lower growth rates as a necessary condition to push forward economic reforms. Xi coined the term “Chinese Dream” as his contribution to the guiding ideology of the Communist Party of China. Although vague, the “Chinese dream" emphasizes people’s happiness and the idea of a strong China.

China’s Balance of payments

China’s external position is extremely solid. The current account has recorded a surplus in every year since 1994. The capital account followed suit and only recorded two deficits in the last 20 years. This situation of surpluses in the both the current and the capital put pressure on the national currency and prompted the Central Bank to sterilize most of the foreign currency that entered the country. As a result, China’s foreign exchange reserves skyrocketed to almost USD 4.0 trillion in 2014. The current account surplus reached its peak in 2007, when it represented 10.1% of GDP. Since then, however, the surplus has narrowed and in 2013 it fell to only 2.0% of GDP.

China’s capital account has bold controls, which implies that the country lacks the freedom to convert local financial assets into foreign financial assets at a market-determined exchange rate and vice versa. The new Xi-Li administration and the People’s Bank of China vowed to accelerate interest rate liberalization and capital account convertibility. In this regard, Chinese authorities have started to implement some measures, such as removing a cap on foreign-currency deposit rates in Shanghai.

The capital account benefited from strong inflows of Foreign Direct Investment (FDI). FDI has performed strongly in the last decade, with record inflows of USD 118 billion in 2013, thereby becoming the second largest recipient of foreign investment. Among the countries that invest more in China are Hong Kong, Singapore, Japan, Taiwan, and the United States. In addition, China’s outward investment soared in recent years and, according to some analysts, the country could become a net exporter of capital in the coming years.

China’s Trade Structure

China has experienced interrupted merchandise trade surpluses since 1993. Total trade multiplied by nearly 100 to USD 4.2 trillion in only three decades and, in 2013, China surpassed the United States as the world’s biggest trading nation.

The opening of the country and the government’s massive investment programs have prompted the country to become a major manufacturing hub. This situation fostered trade growth in the last decades, particularly after China joined the World Trade Organization in 2001. As an economy highly integrated into the global trade system, the country benefited from a steady improvement in its terms of trade since 2000. However, the global economic downturn in 2008-2009 led the country to reduce manufacturing output, thus putting a drag on China’s trading sector.

Moreover, the country has engaged in several bilateral and multilateral trade agreements that have opened new markets for its products. In 2003, China signed the Closer Economic Partnership Arrangement with Hong Kong and Macau. A Free Trade Agreement (FTA) between China and the ASEAN nations came into effect on January 2010, which created the world’s third largest free trade area in terms of nominal GDP. China also established, among others, FTA with countries such as Chile, Costa Rica, Pakistan, Peru, New Zealand, Thailand and Singapore. Moreover, there are other FTA under negotiation with Australia, the Gulf Cooperation Council, Japan, Korea and Norway.

Exports from China

Electronics and machinery make up around 55% of total exports, garments account for 13% and construction material and equipment represent 7%. Sales to Asia represent over 40% of total shipments, while North America and Europe have an export share of 24% and 23%, respectively. Although exports to Africa and South America expanded rapidly, they only account for 8% of total shipments.

Due to favorable global trade conditions and China’s accession to the World Trade Organization in December 2001, the country has experienced an astonishing growth of 26.9% annually in real goods and services exports during the 2002-2008 period.

While exports contracted sharply in 2009 due to the downturn in global demand, shipments in 2010 and 2011 rebounded strongly following the 2008 financial crisis. In 2012 and 2013, export growth averaged 7.8%.

In nominal terms, merchandise exports jumped from just USD 267 billion in 2001 to USD 2.2 trillion in 2013, which represents annual average growth of 20.2%. According to FocusEconomics Consensus Forecast panelists’ projections from September 2014, Chinese exports are expected to slow to a 6.6% increase in 2014 following an expansion of 7.9% in 2013. Panelists see exports picking up in 2015 to an 8.8% expansion.

Imports to China

In order to supply factories and support China’s rapid development, the country’s imports are mostly dominated by intermediate goods and a wide range of commodities, including oil, iron ore, copper and cereals. China’s soaring demand for raw materials has pushed global commodity prices up in recent years, thereby boosting the coffers of many developing nations and commodity-exporting economies.

Supply of imports into China is mostly dominated by Asian countries, with a combined share of nearly 50% of total imports. Purchases from Europe and North America account for 17% and 10%, respectively. As a major global buyer of commodities, imports from Africa, Australia, the Middle East and South America have increased strongly in the last decade to represent a combined share of around 23%.

In parallel with skyrocketing exports, growth in imports of real goods and services soared in the 2002-2008 period, recording an annual average expansion of 24.4%. Imports experienced a contraction in 2009 due to the global crisis, but recovered quickly in 2010 and 2011. In the 2012-2013 period, imports recorded a modest increase of 7.2%.

In nominal terms, merchandise imports increased more than eight-fold in the 2001-2013 period, increasing from USD 244 billion in 2001 to USD 2.0 trillion in 2013. FocusEconomics Consensus Forecast panelists’ projections from September 2014 show Chinese imports moderating slightly from a 7.3% increase in 2013 to a 6.9% expansion in 2014. In 2015, panelists expect imports to accelerate to a 9.3% expansion.

China’s Economic Policy

Economic growth soared in the last few decades mainly due to the country’s increasing integration into the global economy and the government’s bold support for economic activity. However, the successful economic model that lifted hundreds of millions out of poverty and fueled the country’s astonishing economic and social development has also brought many challenges. Severe economic imbalances, mounting environmental issues, rising economic inequality and an aging population are the key questions that the new administration lead by President Xi Jinping will have to tackle in the near future in order to ensure the country’s sustainability.

The final communique of the Third Plenary Session of the 18thChina Communist Party (CPC)’s Central Committee held in Beijing on 9-12 November 2013 unveiled an ambitious road map for economic reform. Chinese authorities vowed to deepen economic reform and give the market a decisive role in allocating resources. That said, they reaffirmed the leading role of the state in the economy. Authorities also stressed the need to promote market-oriented reforms in state-owned companies and to accelerate interest rate liberalization, capital account convertibility and exchange rate reform. According to the Plenum communique , reforming the hukou system of household registration, enhancing farmers’ property rights, further development of social welfare, improving the judiciary system and promoting a more developed fiscal system would be on the agenda. In addition, Xi launched an aggressive anti-corruption campaign, which targeted senior officials of the Communist Party.

Although gradual, Chinese authorities have already unveiled a series of reforms in a wide range of sectors, signaling Xi Jinping and Li Keqiang’s commitment to push forward their agenda.

China’s Fiscal Policy

Before 1978, China had a highly centralized fiscal system, which mainly reflected the country’s planned economic system. The central government collected all revenues and allocated all the spending of the administration and public institutions. In parallel with the reforms implemented in the country for Deng Xiaoping, the government started to decentralize the fiscal system.

In 1994, the government launched a bold fiscal reform in order to struggle against a rapid decline in the tax/GDP ratio, which dampened the government’s ability to conduct macroeconomic and redistribution policies. The flagship of the reform was a new taxation system and the adoption of a tax-sharing scheme, where the most lucrative sources of tax revenues, such as the Value-Added Tax and the Enterprise Income Tax, were administrated by the central government.

The result of this reform was a steady increase in revenues, which jumped from 10.8% of GDP in 1994 to 22.7% of GDP in 2013. While expenditures followed suit and increased at a double-digit rate in the same period, the fiscal deficit was kept in check. In the 1994-2013 period, the government’s fiscal deficit averaged 1.4% of GDP.

The new system, however, left local government with just few sources of revenue and they had to rely on land sales and indirect borrowing (mostly so-called “shadow banking”) to finance their activity. In addition, local governments put in place off-budget local government financing vehicles to raise funds and finance investment projects. According to data released by the National Audit Office in December 2013, the total amount of debt held by local governments was CNY 17.9 trillion (USD 3.0 trillion) or 33.0% of GDP, which was well above the CNY 10.7 trillion reported in the 2010 audit.

Although debt is still at manageable levels, the government should be wary of both the increase in reliance on shadow banking and the rapid pace of debt accumulation. Moreover, the government should increase the revenue sources for local governments. In this regard, in August 2014, the National People’s Congress passed amendments to the budget law, allowing provincial government to issue bonds directly and increase transparency. This move paves the way for local governments to raise debt in the bond market.

China’s government debt is almost entirely denominated in local currency and owned by domestic institutions. In addition, the government has cash savings equivalent to 6% of GDP in the People’s Bank of China. This situation shields the economy against government debt crises.

China’s Monetary Policy

Under the guidance of the State Council, the People’s Bank of China (PBOC) formulates and implements monetary policy, prevents and resolves financial risks, and safeguards financial stability. The PBOC’s main objectives are: ensuring domestic price stability, managing the exchange rate and promoting economic growth. At the beginning of each year, the State Council establishes guiding targets for GDP, the Consumer Price Index (CPI), money supply (M2) and credit growth. The PBOC’s policy rate is the one-year lending rate. The Bank’s last change in its key policy rate was in July 2012 and the lending rate has remained at 6.00% since then. In monetary policy reports from Q1 and Q2 2014, the Central Bank vowed to maintain a “prudent” monetary policy while conducting policy fine-tuning at an appropriate time.

The Central Bank manages money supply through Open Market Operations (OMO), which are conducted with both domestic and foreign currencies and comprise repo and reverse repo, government securities and PBOC bills. The Bank also uses the reserve requirement ratio to influence lending and liquidity. The reserve requirement ratio for major lenders currently sits at 20.0%, where it has rested since May 2012. Other instruments that the Central Bank uses to manage and adjust liquidity in the banking system are short-term loans, short-term liquidity and standing lending facility operations.

The agenda of China’s top authorities include bold reforms on interest rate and monetary policy management in order to adopt a more market-driven approach.

China’s Exchange Rate Policy

The IMF labels China’s exchange rate regime as a crawl-like arrangement. The speed and direction of the crawling peg is decided by Chinese authorities according to domestic and international economic developments. The PBOC classifies its regime as a managed floating exchange rate regime based on market supply and demand with reference to an undisclosed basket of currencies. The U.S. dollar is likely to represent a large stake of the basket. The yuan fluctuates in an intraday trading band around an official midpoint rate. On 15 March, the PBOC widened the trading band from +/-1 to +/-2.

From 1995 to 2005, China kept its currency fixed versus the U.S. dollar at around 8.28 CNY per USD. This was the case until 2005, when it switched to a managed float of the currency to facilitate a controlled appreciation of the CNY. However, in the wake of the global financial crisis, China pegged its currency to the USD at 6.82 CNY per USD from June 2008 to June 2010. In 2010, the PBOC allowed the yuan to trade more flexibly.

While the Chinese yuan is freely convertible under the current account, it remains strictly regulated in the capital account. Chinese authorities expressed their willingness to allow the yuan to be fully convertible in the near future.

Chinese authorities are gradually enhancing the use of the currency in other parts of the world in order to promote the yuan as a global reserve currency. Although the process is far from being completed, China has already established trade settlements with selected countries and launched a series of currency swap agreements with more than 20 central banks. In addition, China is rapidly expanding the yuan’s offshore market. The opening up of the country’s capital market will be a crucial step in the yuan’s journey to becoming a major reserve currency.

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China Facts

Bond Yield2.740.66 %Oct 26
Exchange Rate6.77-0.15 %Oct 26
Stock Market3,116-0.50 %Oct 26

China Economic Growth

October 18, 2016

While a disordered correction in the real estate market and ballooning private debt cast a cloud on the country’s economic outlook, the authorities’ willingness to avert any sharp economic downturn promises to shore up growth. FocusEconomics panelists see GDP growing 6.6% this year, which is unchanged from last month's forecast. Next year, the panel sees GDP growth slowing to 6.3%.

China Economic News

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