From McKinsey & Co:
And more on McKinsey:Provided geopolitical movement doesn’t derail his best laid predictions, Gordon Orr sees a year of slowing economic growth, headaches for multinationals, demographic anxiety, and buyer’s remorse for soccer tycoons.My base case for China’s
outlook this year assumes increased trade friction with the United States, with tariffs raised on specific product categories (such as steel and some agricultural goods), and, while I don’t expect across-the-board disruptions, a few high-profile companies will be forced to choose between accommodating the demands of the Chinese or US government.
Of course, if recent statements from US politicians translate into sweeping action on trade, 2017 could develop very differently. Tit-for-tat moves on specific companies and sectors could easily escalate, with many multinationals’ global supply chains caught in the middle and consumers around the world facing product shortages and, when products are available, material price increases. China’s government could implement sweeping actions to sustain employment, restrict further capital outflows, and stimulate the domestic economy. Market-oriented restructuring and reform would be off the table. Economic nationalism, food and energy security, and social stability would be paramount.
But if globally we continue with something recognizably close to current trade arrangements, how will China fare this year? And, most important for a country that regards economic growth as of paramount importance (the centerpiece of China’s 13th five-year plan remains to double GDP and household income in the decade to 2020), can 2016’s GDP growth in the ballpark of 6.5 percent be replicated?
Matching 2016’s economic growth will be a struggle
Where will China’s growth come from this year? It is unlikely to come from exports—even ignoring potential protectionist moves in major export markets, there’s nothing that would significantly increase the world’s demand for Chinese goods. What about currency depreciation to make exports more competitive? That will be quickly offset by rising wages. Could growth come from consumers?
Will they feel good enough to increase spending another 8 to 10 percent this year? They will likely spend a lot less on buying property and fitting it out (because of government action to restrain prices and restrict access to mortgage financing) and less on cars if the current tax break expires. Moreover, real salary increases are likely to be the lowest since the Lehman crisis, and with house prices expected to be flat, there won’t be a repeat of last year’s wealth effect. The stimulation of e-commerce making goods available in smaller cities for the first time may help, but technology displacing jobs in services, not just manufacturing, certainly won’t. In fact, its impact is becoming more and more visible, leading more and more consumers to not only worry about losing their jobs but also actually see them eliminated. The impact of technology on creating jobs in fields such as medical and education services will benefit the privileged few with the skills to take advantage, but it will not offset the near-term job losses.
Will investment-driven growth, in sectors beyond property, take up the slack again? To some extent, absolutely yes. Private-sector corporate investment will accelerate this year, recovering from the low levels of 2016. Lower real interest rates will stimulate investment in productivity-enhancing technologies, such as robots and cloud-based services. And the government hasn’t run out of good (or bad) infrastructure projects to spend on—everything from urban transit (such as the $36 billion project to create a megacity by improving transport links among Beijing, Tianjin, and the neighboring province of Hebei) to intercity rail, water treatment, and 5G projects. Collectively, these projects could deliver several percentage points of growth in a manner similar to a decade ago, but not without debt levels reaching 300 percent of GDP by the end of the year.
All of this still seems unlikely to get China’s economy to 6.5 percent growth this year, so look in the second half for constraints on property development to be rolled back. In sum, I see 2017 as a year of running faster and using more effort in traditional ways, to, in the end, travel more slowly.
Watch out if steel prices drop
Last year began with much fanfare over promised government-enforced reductions in coal and steel capacity, and by November the government had declared success. In reality, it would have been embarrassing if the goals had not been reached, considering how modest they were. Taking out the promised 250 million tons of coal capacity was less than the capacity added in the prior year, mostly illegally (and much of this capacity could still reemerge). The more significant impact came as a result of restricting production by limiting the number of days that (mostly state-owned) mines could operate. Coal production fell around 12 percent, but prices are up 80 percent. Great for mine owners, not so great for coal users.
In the steel sector, a reduction of 45 million tons of capacity still left an excess of several hundred million tons. At the time of writing, steel production is actually up for 2016 (as are steel prices) on growing demand from the construction and automotive sectors. The few announcements of industry consolidation have largely been the big merging with the big to get even bigger. The deals aren’t leading to reduced capacity or higher productivity, and unless steel plants are dismantled, there remains the possibility that latent capacity could return to the market....MORE
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