Chinese people are celebrating these days the beginning of their New Year. 2018 is the Year of the Dog for the Chinese. Festivities have already started in China and they are going to last for two weeks. Traditional celebrations include bell ringing, watching the famous lion dances and lighting firecrackers. New year means new beginnings or a chance to change. When it comes to the Chinese economy, the change is already in progress.
China’s GDP growth beat expectations in 2017
The Chinese National Bureau of Statistics announced in January 2018 that the country’s Gross Domestic Product (GDP) expanded by 6.9% during 2017. China’s GDP growth in 2017 beat analysts’ expectations who had been anticipating that the Chinese economy would grow by 6.7%. This was the first time that the GDP’s rate of growth accelerated in the last seven years. During 2017, Chinese policymakers focused on cutting the national debt and have ramped up the effort to cut the air pollution, produced by the Chinese industry, without putting a strain on the growth of the world’s second-largest economy.
Chinese economic outlook in 2018
An International Monetary Fund (IMF) report published on 6th December 2017 said that the IMF is concerned over imbalances in the Chinese economy. According to the report, IMF analysts noted that the four largest Chinese banks have adequate capital but “medium and city-commercial banks appear vulnerable.” Stress tests conducted by the IMF showed that 27 out of 33 banks tested needed to raise more funds, despite the fact that they comply with Basel III regulations regarding capitalisation.
An IMF report, released on 22nd January 2018, said that the US-based lender upgraded its estimates for the Chinese economy’s growth in 2018 and 2019. In the IMF’s World Economic Outlook report, analysts forecast that the largest Asian economy will grow by 6.6% and 6.4% in 2018 and 2019 respectively. In October 2017, when the previous World Economic Outlook report was published, both estimates were 0.1% lower. The reason behind the IMF’s revision is the surge in exports as a result of the global economic recovery and the strengthening demand for products made in China.
The Chinese economy’s growth is based on fixed-asset investments such as property, plant and equipment (PP&E), which can’t be easily converted into cash. Fixed-assets investments account for more than 50% of the Chinese GDP. However, the third quarter of 2017 (Q3 2017) was the first time that fixed-asset investments declined by 1.1% in the last decades. During the first three quarters of 2017, fixed-asset investments grew by average at a 2.19% rate, which is a significantly lower figure than those recorded in previous years. If the trend of the decline of fixed-asset investment continues, it is possible that the economy will face new challenges.
China’s excess production capacity has brought the country at odds with the US and President Donald Trump who has accused the Chinese leadership for manipulating the national currency (Yuan), the trading strategies followed and the resulting US trade balance deficit with the world’s second largest economy. US President Donald Trump has suggested to impose large tariffs on steel and aluminum imports coming from China. The US administration has already decided to impose a tariff on solar panels imported from abroad as a reaction to the damping strategy that China used to promote them in the market as President Donald Trump said in a Reuters interview, in January 2018.
IMF economists said, in their January 2018 report, that China’s national debt has risen, being almost double of the country’s GDP. The IMF recommended the Chinese authorities “to de-emphasize the GDP’s growth,” and added that implicit guarantees to state-owned enterprises (SOEs) need to be removed carefully and gradually. The People’s Bank of China (PBOC) replied in a statement that “the IMF’s recommendations are highly relevant in the context of deepening financial reforms in the country.”
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