China starts three years of “critical battles” against debt, poverty and pollution in 2018 as policymakers also face rising US interest rates, renewed trade-war threats, and nuclear sabre-rattling from North Korea.
While the nation is starting from a position of greater strength, with full-year expansion in 2017 poised for its first acceleration since 2010, the world’s second-largest economy is seen slowing in 2018, even without any of the more grave dangers materialising. As a result, the government of Xi Jinping is signalling that it’s sanguine about more modest economic performance if progress on the number one risk — financial fragility — can be made.
“Significant economic imbalances continue to create downside risk to the outlook for 2018,” said IHS Markit chief Asia-Pacific economist Rajiv Biswas in Singapore. “Risks to the Chinese economy will remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region particularly vulnerable to the shock waves from a slowdown.”
Those waves have not materialised yet, and in fact, economic activity is holding up. The official manufacturing purchasing managers index was at 51.6 in December, signalling improving conditions. New manufacturing export orders also climbed to a six month high, according to a sub-index.
Still, forecasters see expansion slowing to 6.5 per cent, the slowest pace since 1990, this year, the following are among areas they flag as having the potential to trip up economic growth or spur market turbulence.
Financial Risks
The Communist Party recently renewed its pledge to prevent and control financial risk, calling it a pivotal challenge for the next three years. As the financial system opens further to foreign firms, a debt-to-GDP ratio that’s heading toward more than 320 per cent by 2022 stands as the main danger.
“Even its own propaganda machine admits that this is such a serious problem that Beijing doesn’t expect there to be any solution in anything less than three years,” said research firm Asia-Analytica managing director Pauline Loong in Hong Kong. “Financial instability is the core problem. Solve that and you ease pressure on capital outflows, complications from deleveraging, weaknesses in smaller banks.”
Construction Slowdown
The tightening of financial and environmental regulations to help curb debt may cause tremors in 2018 that slow housing and infrastructure construction, according to HSBC Holdings Plc co-head of Asian economics research Frederic Neumann in Hong Kong.
“A sharper-than-expected slowdown in construction could thus weigh on broader activity with emerging sectors not yet vigorous enough to provide a sufficient cushion,” said Neumann. “The biggest fault line running through the Chinese economy is the construction sector.”
Trade Brawl
U.S. President Donald Trump’s recent national security strategy speech was a “tee up” for a turn toward protectionism, says the US Treasury Department former China specialist David Loevinger.
“On the menu for 2018: lots of red meat for the base, and that means bashing imports,” said Loevinger, now an analyst at TCW Group Inc. in Los Angeles. “Since nationalistic populism is as irresistible in China, Chinese politicians will feel compelled to retaliate.”
Fed, Tax
If the US Federal Reserve raises interest rates more than markets expect and tax cuts build on underlying 3.2 per cent growth, the dollar may get a second wind that puts the yuan and capital outflows under pressure again, according to George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG.
“If the Fed starts hiking and the dollar goes on a bull run, that would cause big problems,” says HSBC School of Business at Peking University associate professor Christopher Balding in Shenzhen.
North Korea
Should tension between the US and North Korea escalate into a more significant confrontation, there will be profound and far-reaching consequences not just for China’s economy but that of the entire Asia-Pacific region, says National Institute of Financial Research deputy director Zhu Ning at Tsinghua University in Beijing.
