Five Vitamin C’s for the Chinese Winter

12/13/2016 - Report
ic_blogtagAsia-Pacific,  China,  Automotive,  Construction,  Credit,  Currency,  Emerging Markets,  Exports,  Investment,  Overcapacities,  Trade agreements

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To tackle head on the economic challenges China faces, this report suggests a 5C’s strategy.

  • 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. 
  • 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).