28 October 2016
China's property market may see some more correction next year. Photo: CNSA
China's property market may see some more correction next year. Photo: CNSA

China economy: What lies ahead in 2016?

China’s economic growth is expected to moderate to the 6.6-6.8 percent range next year, according to a “blue paper” from the Chinese Academy of Social Sciences (CASS).

The world’s second largest economy is entering a “new normal” as a structural transformation gathers pace. External demand, meanwhile, remains weak amid a dim global trade environment.

China will see its investment growth rate ease in the coming years. But consumer inflation is expected to pick up, rising above the 2 percent level.

Authorities will step up efforts to shore up the real economy, but they should take care that they don’t neglect capital market development.

A-shares remain a key option for investors as there are limited asset allocation choices available in the market.

President Xi Jinping has repeatedly stressed that the government will stabilize the stock market and protect small investors. In addition, various government leaders have talked about averting big market ups and downs. Such efforts would become part of the driving force for the equity market in the future.

Meanwhile, the property market, which was once considered as the source of an economic bubble, has become a stabilizer for the economy.

That said, the real-estate sector is still in the middle of a correction. The housing sector will remain sluggish for at least another two years. Investment in the housing sector will slide further, given the projects already underway, high level of inventory and stagnant sales.

The CASS suggests that the government should increase the flexibility of the Chinese yuan, consider introducing a wider trading band and also liberalize the capital account cautiously and gradually.

The Chinese central bank should act independently and give priority to improving the bankruptcy system for state-owned enterprises (SOEs). The nation’s heavy industries and export sector might witness deteriorating employment situation next year.

The yuan has been weakening against the US dollar recently, causing the unit to fall to a multi-year low. That has stoked market concerns for further currency depreciation.

Some foreign financial institutions have been quite pessimistic. Some predicted that the yuan may weaken to the 6.9 level against the dollar next year. If that happens, it could trigger a “domino effect”. Oil and other commodity prices may continue to struggle. It is likely to even trigger currency war in Asia or even worldwide.

President Xi has said that economic growth would be maintained at a medium to high pace during the 13th Five-year Plan period.

China has to maintain a certain growth rate if it intends to double the GDP and per capita income by 2020 from the levels of 2010. Annual growth should be maintained at above 6.5 percent between 2016 and 2020.

Beijing still has plenty of tools to shore up the economy.

Now, what about the prospects for the Chinese currency? The State Administration of Foreign Exchange (SAFE) has stressed that the short-term fluctuation of the yuan should not be considered as heralding long-term depreciation. And it hopes that the market will look at how the yuan fares against a basket of currencies in the long run.

In addition, SAFE thinks the market has shown very little tolerance towards yuan fluctuation. A two-day fall would stoke market talk about yuan depreciation. If such concerns go out of control, it could affect the market expectations for and trading of the yuan.

The redback remains relatively stable compared to other major currencies despite continued weakening over the last few months.

The fluctuation has been reflected in the market supply and demand, as well as movements in global financial markets. The US dollar has kept strengthening since November. As a result, the pound sterling, the Japanese yen and euro all have posted big correction. In this case, the Chinese yuan won’t be an exception, and investors should live with it.

This article appeared in the Hong Kong Economic Journal on Dec. 21.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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