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China Economic Quarterly Q4 2016
China announces new measures to attract foreign investment in 2017
February 2017
Major economic indicators p1/Policy updates p12/Hot topic analysis p13
www.pwccn.com/ceq
ContentI. Major economic indicators 1
II. Policy updates 12
III. Hot topic analysis
What China plans to do in 2017?
What's next for the Renminbi under Trump’s presidency?
13
13
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1.70%
2.20%
1.60%
1.70%
1.80%
1.90%
1.70%
2.00%
1.70%
1.80%
1.50%1.30%
1.9%
1.8%
1.7%
0.00%
1.00%
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6.7%6.9%
7.30%7.80%
Major economic
indicators
China’s GDP in the fourth quarter of 2016 increased by RMB 21.13 trillion or
6.8%. As a result, GDP for the whole year of 2016 reached RMB 74.41 trillion,
6.7% higher than in 2015.
In the fourth quarter, the primary industry, the secondary industry and the
tertiary industry (services) grew 3.3%, 6.1% and 7.8% respectively. Overall,
services accounted for 51.6% of total GDP and consumption contributed 64.6%
to economic growth. In 2017, GDP growth is likely to retain its growth
momentum, though growth rates could fall slightly as supply-side structural
reform progresses and global economic uncertainties escalate.
Quarterly GDP values and quarterly and annual GDP growth rates
I
PwC 1
Quarterly growth Annual GDP growth
GD
P (
Tri
llion
s o
f R
MB
)
Source of data: Unless otherwise stated, economic data is from the National Bureau of Statistics and financial data from the People’s Bank of China.
GDP composition
2 China Economic Quarterly Q4 2016
2%
4%
6%
8%
10%
12%
14%
16%
20%
30%
40%
50%
60%
70%
80%
90%
Fixed asset investment/GDP
YOY growth rate of GDP (the right of the vertical axis)
Source: Wind
Fixed asset investment
remained a key driver in China’s
economic growth. By the end of
2016, fixed asset investment rose
steadily by 8.1% from last year to
RMB 59.65 trillion, around 80% of
GDP. Among them, state sector
investment rose by 18.7% year-on-
year, while private investment,
accounting for 61.2% of the total
investment, only increased by 3.2%
in the year. This shows subdued
business confidence, though its
growth in the fourth quarter was
slightly higher than in the previous
quarters.
Investment in the tertiary industry,
which accounts for 58% of total
investment, rose by 10.9% in line
with overall GDP growth trend.
Investment in infrastructure
swelled by 17.4% to RMB 11.89
trillion, or 20% of total investment.
In 2017, the government will
continue its massive investment in
major state projects in the areas of
clean energy, transport,
communication and oil & gas
pipelines, environmental
protection, modern logistics, city
rail, emerging industries and
upgrading of manufacturing, as
included in the 13th Five-Year Plan.
Yet the challenges are how to deal
with the diminished marginal
returns on investment and how to
ensure future funds will flow into
productive sectors instead of
“zombie enterprises”.
In 2016, the scale of PPP (public
private partnership) projects surged
to a couple of trillion yuan. It was
originally designed to boost private
investment mainly for
infrastructure, but state-owned
enterprises ultimately became the
leading force.
Fixed asset investment as a proportion of GDP is increasing
constantly in China
Fixed asset investment: accumulated growth rate P
erc
en
tage
Month
PwC 3
The real estate sector became
another booster of the economy
after experiencing a surprisingly
high growth in 2016. Sales of
commercial properties rose 22.4%
year-on-year, and real estate
investment jumped by 6.9% (7.5%
in real terms if deducting price
factor) over the previous year to
RMB 10.3 trillion, which is 17% of
total fixed investment. The boom in
real estate has also triggered growth
of related industries, such as steel,
construction, home decoration and
furniture. However, due to the
rapid rise of property prices in
many cities, the government has
recently staged new regulations to
restrict further investment and
“speculative” purchases by residents
and investors. It is expected that this
will have a knock-on effect on the
housing market in 2017.
Growth rates in real estate
4 China Economic Quarterly Q4 2016
0.0
0.5
1.0
1.5
2.0
2.5
3.0
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4.0
4.5
0
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40
60
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100
120
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160
180
Narrow Money (M1)
Broad Money (M2)
Official Reserve Assets: Foreign ExchangeReserves
(RMB trillion)(USD trillion)
China’s money supply and foreign reserves
China has maintained an aggressive
monetary policy throughout 2016.
Money supply (money & quasi-
money) rose from RMB 141.4 trillion
at the beginning of the year to RMB
155 trillion by the end of 2016,
making China’s stock of currency in
circulation equivalent to that of the
US, the EU and Japan combined.
Meanwhile, bank loans jumped
13.5% year-on-year to RMB 12.65
trillion, RMB 925.7 billion more
than in 2015. Due to under-
development of the financial market,
bank loans accounted for 69.9% of
China’s total financing for the real
economy, and bond and capital
markets only provided 16.8% and
7% of financing.
Massive money supply has exerted
great pressure on RMB’s exchange
rate, which fell from RMB 6.55 per
dollar at the beginning of the year to
RMB 6.92 per dollar at the end of
2016. Renminbi depreciation
expectations and the explosive
growth in outbound investment by
Chinese companies had raised the
demand for foreign currencies,
causing China’s foreign reserves to
shrink from US$ 3.23 trillion at the
beginning of the year to US$ 3.01
trillion at the end of 2016 (falling
below the mark of US$3 trillion in
January 2017), which brings the total
to a six-year low.
PwC 5
China's manufacturing
purchasing managers’ index
(PMI) experienced the highest
performance since 2012 in the
fourth quarter of 2016, reaching
51.2%, 51.7%, and 51.4%
respectively for the last three
months, thanks to booming
domestic demand, rising prices and
growing activities in high-end
manufacturing. A figure above 50%
indicates expansion.
In December, PMI for large-sized,
medium-sized, and small-sized
enterprises stood at 53.2%, 49.6%
and 47.2% respectively. Meanwhile
China's non-manufacturing PMI
recorded a much stronger growth of
54.0%, 54.7% and 54.5% for the last
three months of the year. These
positive growth trends are likely to
continue in 2017.
46.0%
47.0%
48.0%
49.0%
50.0%
51.0%
52.0%
53.0%
54.0%
55.0%
56.0%
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Manufacturing Non-manufacturing 50% breaking point
Perc
en
tage
Purchasing managers’ index
6 China Economic Quarterly Q4 2016
In the fourth quarter, industrial
added values maintained its stable
growth of 6.1%, 6.2%, and 6.0% in
real terms in the last three months.
For 2016, industrial added values
expanded by 6%, 0.1% lower than in
2015. By ownership, industrial
added values of SOEs went up 2.0%,
collective enterprises fell by 1.3%,
joint-stock enterprises rose 6.9%,
and foreign-owned enterprises
expanded by 4.5%. Among all the
industries, manufacturing and high-
tech industry registered the highest
growth rates of 6.8% and 10.8%,
respectively.
As for PMI, another positive
development is industrial profits for
enterprises above certain scales have
reversed the downward trend and
grown by 8.5% in 2016 over last
year. While profits for mining
industry declined by 27.5%, profits
for equipment manufacturing and
high-tech manufacturing rose by
8.4% and 14.8% respectively,
signaling that China was on track to
grow its Industry 4.0 capabilities.
Month
Perc
en
tage
Growth of industrial added values (for companies over certain scales)
PwC 7
Retail sales of consumer goods: accumulated growth rate
Domestic consumption
sustained its role as one of the most
important drivers of economic
growth in 2016, with total retail
sales of consumer goods increasing
by 10.4% year-on-year (the real
growth rate was 9.2%) to RMB
33.23 trillion. On a quarterly basis,
it was 10.3%, 10.2%, 10.5% and
10.6% respectively with a stable
growing trend.
The national online retail sales of
goods and services, accounting for
16% of total retail sales, stood at
RMB 5.16 trillion, up by 26.2%
from last year. As China’s online
shopping has gained popularity and
will further expand, it will continue
to erode traditional retail sales in
the coming years.
China’s national per capita
disposable income continued its
growth momentum, rising by 8.4%
(real growth of 6.3%) from last year
to RMB 23,821 in 2016. Per capita
consumption expenditure rose by
8.9% (6.8% in real term) from last
year to RMB 17,111. It is expected
that domestic consumption will
remain active and a major driving
force for economic growth in 2017.
Month
Gro
wth
rate
8 China Economic Quarterly Q4 2016
The total value of China’s imports
and exports in 2016 fell by 6.76%
year-on-year to US$3.685 trillion,
with exports falling by 7.7% and
imports contracting by 5.5%,
leading to a reduced trade surplus
of US$510 billion, as compared
with US$594.5 billion in 2015.
In December, exports slipped 6.1%
from a year ago and imports rose
3.1% year-on-year, much in line
with expectations.
China’s trading situation is unlikely
to improve significantly in the
coming year, given the enduring
sluggish global demand and
heightened trade frictions with the
developed markets, especially with
the US.
Quarterly balance of trade
PwC 9
Source: Wind
The Producer Price Index (PPI)
has dramatically improved in the
last quarter of 2016, rising to 1.2%,
3.3%, 5.5% respectively from
October to December, thanks to
surges in commodity prices and
the after-effect of the supply-side
structural reform for cutting
industrial capacity and inventory.
As a result, both industrial
production and market demand
had increased.
For the whole year of 2016, PPI
went down by 1.4% year-on-year.
PPI turned positive in September
after 54 consecutive months of
decline. It is expected to stay above
zero in 2017.
The consumer price index (CPI)
remained stable for much of 2016,
with the overall CPI increasing by
2.0% year-on-year. It is worth
noting that most price hikes came
from the food sector, where prices
for fresh vegetables and pork went
up 11.4% and 16.9% respectively
due to cyclical supply shortages.
Meanwhile, prices for healthcare
went up 3.8%, as a result of rising
demand for high quality services,
and prices for household services
rose 4.4% due to shortage of skilled
labour. For 2017, we expect that
CPI is likely to stay in the same
positive range.
Month
Gro
wth
(con
traction
) ra
teProducer price index and consumer price index
10 China Economic Quarterly Q4 2016
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-6
-4
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PPI CPI
Policy update
Meanwhile, the government vows to
improve protection of intellectual
property rights (IPR) and set up IPR
arbitration centres in China.
These measures are released against the
background of dwindling foreign
investment in China, especially in
manufacturing, in recent years, rising
cost of production, depreciating RMB,
more Chinese companies relocating to
lower cost neighbouring countries and
even to America, and bold tax cut plans
by the US and the UK for strengthening
their competitiveness. They also
resonate with the calls of President Xi
Jinping at the World Economic Forum
in Davos for opposing protectionism
and promoting further globalisation
and opening-up.
Yet it remains to be seen when the
details and timetables for enforcing
these measures will be released by the
designated government departments.
At times, reform measures announced
by the top were delayed or watered
down by interest groups.
China has issued its 13th Five-
Year Plan (2016-2020) to
strengthen the protection and
utilisation of intellectual property
rights. According to the plan, China's
invention patent ownership should
increase from 6.3 per 10,000 people in
2015 to 12 in 10,000, and international
applications will double from 30,000 in
2015 to 60,000 by 2020. Meanwhile,
intellectual property royalties earned
abroad will rise from US$4.44 billion in
2015 to US$10 billion in 2020. The plan
laid out seven major tasks for the
development of IPRs, such as
improving the legal system and
protection for IPRs, promoting
industrial upgrading and international
cooperation.
China’s State Council announced
on 17 January 2017 an
unprecedented set of new
measures to attract foreign
investment. According to the
document, the government will lower
market entry restrictions on foreign
investment in banking, securities,
insurance, futures, credit rating,
accounting and architecture design,
and gradually open up markets of
telecommunications, Internet,
education and transport.
On manufacturing, the government will
lift restrictions in the production of rail
transport equipment, motorcycle, fuel
ethanol, and animal fat. Foreign
invested enterprises (FIEs) are
encouraged to invest in high-end, smart
and green manufacturing, participate in
infrastructure projects in energy, water
conservation and environmental
protection.
Thresholds in oil shale, oil sand and
shale gas will be lowered, and the time-
consuming project approval system for
Sino-foreign cooperation on oil and gas
will be shifted to registration only.
More liberal measures are in the
financial sector. For the first time, FIEs
will be allowed to list in the Shanghai
and Shenzhen exchanges, including
mainboard, SME board and growth
enterprise market, and to issue bonds
in the Chinese markets to expand
financing channels.
FIEs are encouraged to set up research
and development centres in China and
step up cooperation with domestic
peers. They are also allowed to join
national science and technology
programmes, which were previously
off-limits to them.
II
12 China Economic Quarterly Q4 2016
Hot topic analysis
• Pursue a “proactive fiscal policy”
to partly cope with the needs for
the supply-side structural reform
(SSR) and a “robust monetary
policy” to maintain stable
liquidity. Hopefully this will help
keep a reasonable level of GDP
growth (above 6%), though no
specific figure was mentioned,
given the huge uncertainties ahead
and the dent-on effect by SSR.
• Improve regulation to ensure
there will be no systemic financial
risk. The government will step up
efforts to curb the debt-driven
financial markets, reduce leverage
ratios of SOEs and regulate the
debt-raising from local
governments. A few rule-breaking
cases are expected to be exposed
and dealt with as a warning sign.
• Establish a market-oriented long-
term property market mechanism
that can curb real estate bubbles
and prevent erratic fluctuations
through land, investment, legal,
fiscal, taxation and financial
means. Credits for speculative
house purchasing will be
prohibited, as “houses are built to
be inhabited, not for speculation”,
in President Xi’s words.
• Keep a relatively stable exchange
rate of the currency. This means
the government is likely to
continue its current practice of
market interventions to prevent
over-fluctuation of the Renminbi
against the dollar.
China has managed to achieve an
impressive economic growth of 6.7%
in 2016 despite all the difficulties. Yet
2017 will be a more challenging year
for the country, due to rising
protectionism around the world and
downward economic pressures and
financial risks at home. It is also a
crucial year as the all-important 19th
Party Congress will be held in
autumn 2017, when the current
leadership team will be significantly
reshuffled. China needs an amicable
and stable macro environment to
ensure a smooth running of the
meeting.
Understandably, “seeking progress
while maintaining stability” was
adopted as the core theme for 2017 by
the annual tone-setting Central
Economic Work Conference
concluded on 16 December 2016.
Centred on improving quality and
effectiveness of growth, the
government sets the goals of
“stabilising growth, deepening
reform, adjusting economic structure,
benefitting the people and preventing
financial risks” in 2017, according to
the statement of the conference.
To maintain stability, the government
plans to:
IIIWhat China plans to do in 2017?
PwC 13
Meanwhile the government aspires
to drive some major changes and
growth in a number of areas, as it
plans to:
• Deepen the SSR process, with a
focus on increasing efficient
supply, improving supply quality
and enhancing compatibility of
supply with demand.
• Further reduce industrial
capacity in coal and steel
(possibly extending to include
auto and new energy sectors);
shut down a plethora of loss-
making “zombie enterprises”
through mergers and
reorganisations while making
arrangements for laid-off
workers; allow the market to
play a bigger role in industrial
restructuring.
• Cut taxes, fees and other costs
for companies and streamline
administrative approval
procedures.
• Speed up the creation of a
flexible and efficient market-
oriented operation mechanism
for SOEs; push through mixed-
ownership reform, especially in
electricity, oil and gas, railway,
civil aviation, telecoms and
military industries; conduct
pilot reforms for state-owned
asset investment companies
where the state will act as a
stakeholder rather than a SOE
manager; encourage debt-for-
equity swaps through market
and law-based instruments to
lower corporate leverage.
• Advocate “quality first” among
businesses, raise national
quality standards and adopt
comprehensive quality
management by upholding “the
craftsman spirit” and building
up corporate brands; encourage
“innovation-driven”
development and boost growth
of strategic emerging industries
and industrial upgrading.
• Build a law-based business
environment to attract more
foreign investment; level the
playing field for small and micro
businesses by providing better
conditions on market access and
resources allocation.
• Accelerate the legislation of a
civil code to better protect
property rights; overturn wrong
convictions concerning
infringement of property rights
for enterprises, and protect and
support entrepreneurship. To
improve access to financing for
the private sector, the
government will allow the
setting up of more private banks.
• Press ahead with “people-
centred” urbanisation and
promote the overall
development strategies for
western, central, northeast and
coastal regions; further promote
the “three grand strategies” for
the development of Beijing-
Tianjin-Hebei cluster, Yangtze
River Economic Belt and the
Belt and Road region.
In summary, while the Chinese
government is committed to
resolving the inherent structural
issues such as industrial
overcapacity, housing bubbles, SOE
reform and rejuvenation of the real
economy, don't expect to see a bold
reform plan in 2017, as stability will
be the priority. It won’t be smooth
sailing, and the prospect of
heightened trade frictions with
developed countries will make it
more difficult. Watch out.
14 China Economic Quarterly Q4 2016
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0 Source: Wind
Average exchange rate USD:RMB (1994.8.3 - 2017.1.24) (days)
Contrary to these statements, the Renminbi has appreciated sharply
against the dollar instead of depreciation over the past decade since 2004.
Since the appreciation of the dollar started from mid-2015, the Chinese
government has painstakingly made efforts to slow down the speed of the
yuan's depreciation against the dollar. China’s central bank is believed to
have spent about USD 800 billion from its foreign currency reserves to
stabilise the Renminbi.
China has significantly changed its exchange rate formation mechanism
over the past decade, as it has shifted from “hard peg” to the US dollar
nearly ten years ago, to a “managed float regime”. Currently, the
Renminbi’s exchange rate is based on a basket of currencies, not only the
US dollar. According to the IMF definition, this is “crawl-like
arrangement” which is one type of “soft peg”.
During his presidential campaign, Donald Trump has indicated that the
Chinese government may have intentionally depreciated the Renminbi to
gain a competitive advantage for Chinese exports. However, this is a far
cry from reality.
What's next for the Renminbi under
Trump’s presidency?
PwC 15
China’s reform on liberalising its
exchange rate regime has been
widely recognised, especially by the
IMF. Last September, to mark the
launch of the new SDR basket
including the Chinese currency, Ms.
Christine Lagarde, Managing
Director of the IMF, commented
that the Renminbi’s inclusion
reflects the progress made in
reforming China’s monetary,
foreign exchange and financial
systems, and acknowledges the
advances made in liberalising and
improving the infrastructure of its
financial markets.
Earlier this year, former Federal
Reserve Chairman Ben Bernanke
also indicated that calling China a
currency manipulator “doesn't fit
with reality." He acknowledged,
“China right now is working very
hard to keep the Renminbi from
falling.”
Nevertheless, what are the
prospects of Renminbi’s exchange
rate in 2017? What actions should
China take under the current
situation?
According to IMF, there are some
65 countries that have currently
adopted the floating exchange rate
regime, which means the market
dictates movements in the
exchange rate. Though Japan and
the UK intervene their exchange
rate to a great extent, it is still a
floating exchange rate, while the
Canadian dollar is regarded as a
pure floating currency.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
(100 million USD) Source: Wind
China's foreign currency reserves: monthly data (1986.12 - 2016.12)
16 China Economic Quarterly Q4 2016
In order to avoid the possibility of
being labelled as a "currency
manipulator", the best option for
China is to press ahead with the
liberalisation of the yuan exchange
rate, transforming from the current
managed exchange rate regime to
floating rate regime as soon as
possible. Meanwhile, capital control
measures would continue to serve
as the firewall to prevent
unpredictable capital outflow from
China, even as this policy is
believed to have caused extra
barriers to China’s overseas
acquisition deals.
Going forward, the Renminbi’s
exchange rate against the dollar in
2017 will be affected by many
factors, including China’s economic
performance and changes to its
interest rate. Externally the US
dollar remains the biggest variable
as it still carries the heaviest weight
in Renminbi’s currency basket.
Thus far the US markets have
rallied but uncertainties linger over
which policies the Trump
Administration may enact and what
their immediate and long-term
effects will be on the US economy.
To date, the US dollar index is close
to historical highs. Even if
President Trump's economic
policies stimulate the US economy
with higher growth rate, there could
be limited room for the dollar to
rise any further. Besides, a too
strong US dollar could be a
restraint for the full recovery of the
US economy.
Given these circumstances, we
expect that the Renminbi could
further depreciate at least a few
percentage points to the dollar in
2017, as the majority of investors
have expected, but an appreciation
could be not be ruled out, at least
for the short term.
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105
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120Source: Wind
Real dollar monthly index: the major currencies (1986.1 - 2016.12)
PwC 17
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Marketing and Communications
Cynara TanHead of Marketing and Communications Asia Pacific+852 2289 [email protected]
Authors
Allan Zhang Chief EconomistPwC China+86 (10) 6533 [email protected]
G. Bin ZhaoSenior Economist PwC China+86 (21) 2323 [email protected]