China’s economy had a strong start in 2017. FA investment growth picked up, with private sector investment at a yearly high. And though falling auto sales drove retail sales growth numbers to below 10% for the first time since 2003, retail growth sans auto sales was strong at 10.6% YoY.
Does this mean China is in recovery or the robust numbers reflect last year’s expansionary policy? Either way, there are headwinds that could impact the longevity of this turnaround.
1) Declining forex reserves
China’s forex reserves finally rose in February after months of decline as the central bank tried to stabilise a weakening Yuan. But with the Fed raising rates, Yuan could come under pressure again. There could be renewed capital outflows, impacting China’s ability to weather external shocks.
2) A potential trade war with U.S.
Going ahead, threats of tariff imposition and being termed a currency manipulator by the U.S. remain.Trump’s protectionist stance could threaten a trade war and impact China’s recovery.
3) High leverage
To keep GDP growth at 6.5% or above in 2017, Chinese Premier Li has pledged a 12% credit expansion. This means debt will still rise much faster than the output and the economy will continue to be highly leveraged in 2017. This mismatch in debt and GDP growth could lead to misallocation of resources to non-productive sectors, impacting long-term productivity.
But despite these risks, there is agreement on one thing – the encouraging 2017 numbers have abated fears of a hard landing, at least for now!