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China’s economy in rude health but caution needed

6 July 2017 No Comment

By Li Hong in Global Times, July 5, 2017 at 23:38:40
The author is an editor with the Global Times.
The colossal economic engine of China kept its strong momentum in the first half of 2017, with annualized growth widely projected at 6.8 percent. Entering the second half, we haven’t heard any sputtering noises, even though the authorities have tightened monetary policy to rid the world’s second-largest economy of any hidden risks.

Investment bankers in both Chinese and foreign institutions have forecast growth in the third and fourth quarters of 6.7 percent and 6.6 percent. That would allow the country’s 2017 economic expansion to reach at least 6.7 percent.

However, for the policymakers in Beijing, any chest-beating might be unwise. It is vital to avoid complacency and to maintain a sober mind even if the data is all highly promising.

Premier Li Keqiang remarked at the Summer Davos Forum held in Dalian last week that the country wants to maintain medium to high-speed economic growth over a long period. This won’t be an easy job, as the economy’s sheer size – at approximately $11.8 trillion now – makes it harder to rack up double-digit growth rates.

Li pledged macro policy continuity and further fiscal assistance including more tax exemptions for innovative businesses, in order to attain the preset annual growth target.

China’s economy generally improved in the first six months of the year, amid global uncertainties following the Brexit vote and Donald Trump’s victory in the US presidential race. The economy was bolstered by strong government and private investment in infrastructure projects, brisk domestic consumption and accelerating foreign trade.

Infrastructure modernization has never stopped, ever since the country embarked on its economic reform path. Just take a look at the new and huge airport being constructed in the south of Beijing, the T3 terminal being built at Shanghai’s Pudong International Airport, and count the numerous subway trenches extending underground in first- and second-tier cities around the country; you can feel the pulse of the country’s sizzling construction boom.

At the same time, thanks to the high efficacy of a series of policy responses from Beijing, Chinese companies in sectors including infrastructure construction, new and high-technology, e-commerce, financial services, healthcare, tourism and entertainment have turned out to be in much stronger shape, and are sharpening their competitive edge in the market.

The latest statistics show China’s manufacturing engine also cranked back into growth mode in June, expanding at the fastest pace in over three months, as new orders and production rebounded. Both the government and private PMI indexes were in positive territory, indicating economic expansion in the middle of the year.

And, rising incomes and a growing middle class have enabled double-digit consumption growth in the first half, making domestic demand a key pillar for the economy. A growing army of better-paid urban residents – with elevated buying power – is helping with the government’s efforts to rebalance the economy, and their consumption power is likely to spill over to neighboring countries like Thailand, Vietnam, Russia and Japan.

Most market watchers now agree that there is no sign of a precipitous slowdown or a crash in China’s economy.

In the case of any emergency such as the 2008 global financial crisis, China’s policymakers have abundant ammunition available – such as fiscal and monetary tools to stimulate public and private capital investment – to resist a sharp downturn, experts say.

However, there are some issues that need meticulous research and that should be considered by the decision-makers. First, factory owners and equity investors have rising concerns about tightening monetary conditions, as the government has hardened its scrutiny on debts and the central bank has instituted higher borrowing rates to help with the deleveraging drive.

While businesses remain generally optimistic, the mood is still somewhat cautious, underscoring challenges faced by private companies as higher rates raise the costs of financing. Also, there is uncertainty around the housing market, amid the government’s efforts to control home prices and any property bubbles.

The stock market also seems to have lost some of its earlier momentum, with investors increasingly spooked by tight market liquidity. And financial market volatility could easily return when the US raises rates further as expected in the second half of the year. A lack of confidence in the capital market could lead to capital flight, which would harm China’s currency stability and overall economic performance.

The US Federal Reserve has made it clear it will start trimming its balance-sheet debt later this year, which is poised to pull up the greenback and cause headwinds for the global economy, and the emerging economies will prove to be more vulnerable.

To better navigate through these uncharted waters, China’s central bank is expected to be very cautious in using its policy tools – savings reserve ratios and interest rate hikes in particular – to avoid further dampening business sentiment and the equity market. http://www.globaltimes.cn/content/1055089.shtml

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