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China's economy needs 5 doses of Vitamin C

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​“The more you eat, the less flavor; the less you eat, the more flavor.” - Chinese Proverb
There was a time, and not so long ago, when China’s growth outweighed everything else. Year in year out, the appetite for ever bigger GDP rose (see chart below). That is no longer the case.
While China’s economy expands, the pace and nature of growth are changing. Gone are the days of unfettered industrialism. Services are on the rise, manufacturing is fast becoming more fine-tuned. The rebalancing should lead to a healthier economy in the long run. But in the short term, it is sometimes  a cause for perplexity, even confusion.
To tackle head on the economic challenges China faces, our new report suggests a more refined diet. It is based on five doses of vitamin C. Each of these is unique as it derives from a different source and aims at a specific effect. All are linked.
Here’s the list:


Promote Credibility: Improving investors’ faith in government policies will be pivotal to avoid volatility, maintain adequate capital inflows, and support private investment. Clear communication and a reasonable GDP growth target of +6% ± 0.5pp in 2017 are keys. We expect the economy to expand by +6.2% in 2017.
Contain Credit risks: Corporate debt accounts for 170% of GDP, corporate bankruptcies are set to increase by +10% in 2017 (+20% in 2016). A tighter monetary stance in 2018 could initiate a gradual deleveraging.  Supply growth would adjust at a slow pace as authorities will prioritize employment over overcapacity reduction. Reforms of SOEs – which are major suppliers - will likely be gradual.
The ability to reduce excess capacities in basic materials will remain a concern. Demand growth could be modest. Supply growth would adjust at a slow pace as authorities will prioritize employment over overcapacity reduction. Reforms of SOEs – which are major suppliers - will likely be gradual.
Manage the Currency: The RMB could depreciate by -3% in 2017 against the USD. Pressures could mount due to a diverging monetary policy with the US, less favorable news, and higher returns on investment abroad.
Focus on Commerce: USD-denominated goods exports may decrease by -7% in 2016. The US, which accounts for 18% of China’s exports, may increase trade barriers. China will seek new commercial drivers: a price competiveness boost (Market Economy Status), new customers and new investment revenues (One belt One Road), strong partnerships and political influence (Regional Comprehensive Economic Partnership).

Chart: China's GDP growth - current and forecast

 China GDP growth current and forecast 17-18.png

 

 

Sources: IMF, Euler Hermes calculations

Ludovic Subran
Chief Economist
Euler Hermes
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