Upbeat Prospects
Chinese economy grows better than expected, along with encouraging signs of structural improvements
By Zhou Xiaoyan  ·  2017-07-21  ·   Source: | NO. 30 JULY 27, 2017

Zhou Xiyong, head of a foreign trade company in Yiwu in east China's Zhejiang Province, talks with Russian merchants at the 2017 China Yiwu International Commodities Fair on May 6 (XINHUA)
The Chinese economy expanded 6.9 percent in the second quarter of the year, the same rate as in the first quarter. With this, the growth rate has stayed within the 6.7-6.9 percent range for eight quarters in a row. The growth in the first half of the year was better than expected due to satisfactory industrial performance resulting from supply-side structural reform, double-digit export growth amid recovering global demand and burgeoning domestic consumption, especially soaring online spending.

"The Chinese economy continued making progress amid stability. Positive elements are piling up, propping up the economy to maintain medium-to-high speed growth and developing toward a medium-to-high level," Xing Zhihong, spokesperson for the National Bureau of Statistics (NBS), said at a press conference in Beijing on July 17.

According to NBS data, in the first half of the year, the service sector played a more dominant role in propping up the economy, its growth rate outpacing the manufacturing industry's by 1.3 percentage points and contributing 60.2 percent to economic growth, compared with 58.4 percent in 2016.

The manufacturing sector is shifting toward the middle- and high-end quality spectrum, with hi-tech manufacturing expanding 13.1 percent year on year, 6.2 percentage points higher than the overall industrial growth.

To top that off, the economy is steering away from being investment- and export-led toward consumption-driven, with residential spending contributing more to growth. Online retail sales of consumer goods rose 28.6 percent year on year, outpacing total retail sales by 18.2 percentage points.

Xing credited these improvements to the ongoing supply-side structural reform, which focuses on cutting overcapacity and corporate costs, destocking, deleveraging, and strengthening the weak links in the economy.

"The 6.9-percent growth rate for two quarters in a row is in line with increasing intrinsic growth momentum inside the country as well as the trend of quicker global economic recovery," Xu Hongcai, deputy chief economist with the China Center for International Economic Exchanges, said at a seminar on the Chinese economy in Beijing.

Xu noted that although the external environment is still complicated, the positive factors are mounting.

"We have survived the chilliest winter and the first light of dawn is apparent," he said. "The global economy has started a new round of recovery after being sluggish for nearly 10 years. The next eight to 10 years will witness mild growth."

The 2017 Spring Housing Fair in Chongqing Municipality on April 20 (XINHUA)

The economist forecast that China's growth rate is likely to slip slightly to 6.8 or 6.7 percent in the third and fourth quarters. For the whole year, the rate will stay above 6.7 percent, making it possible to realize the goal of doubling GDP and per-capita income from the 2010 levels by 2020.

Zhang Liqun, a research fellow with the Development Research Center (DRC) of the State Council, agreed with Xu, saying stable growth is predicted.

"After years of effort, China has overcome the influence of the global financial crisis and its urbanization problems, and is on the path toward achieving medium-to-high speed economic expansion. Its growth is expected to be generally stable in 2017, with performance similar to or better than that of 2016," Zhang told Beijing Review.

According to him, China's urbanization drive will be a boost to growth in the long run.

By 2016, the share of China's population living in urban areas had risen to 57.35 percent. But registered permanent urban residents accounted for just 41.2 percent of the population. Considering the huge "floating population," China's urbanization still has significant room to run, he said.

In the process of pushing forward a new type of urbanization, China will speed up its infrastructure development through urban agglomerations and public service sharing, he added.

Positive changes

Consumption has become a major driver of the Chinese economy, said Yan Pengcheng, spokesperson for the National Development and Reform Commission (NDRC).

In 2014, 2015 and 2016, consumption contributed 48.8, 59.7 and 64.6 percent, respectively, to economic growth. In the first half of the year, the ratio reached 63.4 percent, 30.7 percentage points higher than that of investment, according to the NBS.

"When a country enters the middle-income range, consumption upgrade will accelerate," Pan Gongcheng, a senior NBS statistician, told 21st Century Business Herald, a leading financial newspaper in China.

A recent report by the Boston Consulting Group, a global management consultancy, said China's consumer market will continue to rise around 10 percent annually, topping the world, despite the slowdown in GDP growth.

In the first half of 2017, retail sales of consumer goods grew 10.4 percent, with online retail sales surging 33.4 percent.

"The trend of massive domestic consumption is taking shape in China. The entire country is experiencing a consumption upgrade," Liu Yuanchun, Deputy Dean of the School of Economics at Renmin University of China, told 21st Century Business Herald.

"With urbanization progressing, residential spending on elderly care, education and autos is rapidly increasing," Liu said. "The increasing convenience of online shopping is also helping unleash great consumption potential."

DRC's Zhang said the robust consumption is backed by deeper Chinese pockets.

"Residents' standard of living has improved constantly, which is evident from more active consumption activities such as online shopping, travel, and eating out. Consumer spending is expected to maintain an upward trend, which will play a vital role in sustaining the growth momentum," he said.

The effects of supply-side structural reform are kicking in. As the reform progresses, the relationship between demand and supply in the market is significantly optimizing, resulting in robust industrial output and fatter profits.

"During the overcapacity reduction campaign, a large amount of poor-performing enterprises were weeded out from the market, making room for quality companies," NDRC's Yan said.

Boosted by this, industrial profits and market expectations are improving.

In the first five months of the year, major industrial enterprises' profits surged 22.7 percent year on year. In June, the purchasing managers' index (PMI) for the manufacturing sector stood at 51.7, 0.5 points higher than in May, while non-manufacturing PMI stood at 54.9, rising two months in a row.

"The manufacturing sector is expanding at a quicker pace, with increasing market demand domestically and globally, optimized supply structure and improved market environment," Xu said.

China's export growth—which dropped significantly during the global economic meltdown—has also picked up momentum in the first half of the year.

In the same period, China's foreign trade surged 19.6 percent with export growing 15 percent and import increasing 25.7 percent.

According to Bi Jiyao, Deputy Director of the Academy of Macroeconomic Research under the NDRC, since the second half of 2016, positive signs in the world economy have been piling up following a prolonged recovery period after the financial crisis in 2008.

"Global trade, investment and manufacturing are picking up momentum. Prices of staple commodities such as oil have bottomed out. Global deflation pressure is mitigating with consumer prices mildly rebounding and the global financial market is stable," Bi told Beijing Review.

Global economic activities have entered a long-missed cyclical recovery, backing the rebound of Chinese exports, he said, adding that this year's global economic growth is likely to be the fastest in recent years.

Reform priorities

Xu suggested China continue its proactive fiscal policy and prudent monetary policy in the second half of 2017, making them more flexible and targeted.

"When growth is stable, it's time for China to press ahead with supply-side structural reform by weeding out poor-performing companies in a more market-based and law-based manner, accelerating structural adjustment in the agricultural sector, revitalizing the real economy and promoting stable and sound development of the property market," he said.

Reform breakthroughs should be made in key areas such as state-owned enterprises, fiscal and financial systems and old-age insurance programs, Xu said.

Bi said China still faces a complicated external environment, including new adjustments in the global financial market, depreciation pressure on the renminbi, capital outflow risks and rising global trade protectionism.

"China should stick to its own path of reform and opening up, steadily push forward cooperation with countries along the Silk Road Economic Belt and the 21st-Century Maritime Silk Road, and deepen multilateral economic cooperation," he suggested.

Xu said institutional obstacles are standing in the way of further unleashing people's consumption potential.

In the first half of the year, per-capita residential spending grew 6.1 percent with inflation adjusted, lower than the 7.3-percent per-capita income increase with inflation adjusted, according to the NBS.

Calling the slower growth of people's spending compared to their income alarming, Xu reasoned out what has stopped people from spending: First, rocketing housing prices are eating into a large part of residents' disposable income. Second, inadequate social security makes people feel insecure and therefore reluctant to spend. Finally, underdeveloped consumer finance is also part of the cause.

After being in the doldrums for nearly two years, the Chinese Government started to destock the large housing inventory in 2015. The result was rampant price surges in large and medium-sized cities. To rein in soaring home prices, many local governments have started tightening home purchase policies from October 2016. But in the meantime, some small cities, especially in underdeveloped central and western regions, still have large numbers of unsold homes.

"Location is the most important factor in the property market. According to market rules, people and capital always tend to flow to big cities and a polarized real estate market between large cities and small townships is inevitable," Bi said.

"If small cities could create more job opportunities by developing industries and provide better public services, it will help mitigate the pressure on large and medium-sized cities. But it's bound to be a long-term process."

Copyedited by Sudeshna Sarkar

Comments to zhouxiaoyan@bjreview.com

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