A newly opened upscale mall in Beijing: the CPI grew 1.6 per cent year-on-year in 2017.
According to the 19th National Congress of the CPC and the Central Economic Work Conference, "improving the quality of economic growth" will become an important focus of China's macro policy in 2018.
In light of this requirement, China is expected to maintain its prudent, neutral and somewhat tight monetary policy. The central bank will stabilise the liquidity by "cutting the peak to fill up the valley", and may pursue a targeted easing policy for small and micro enterprises and agriculture, countryside and farmers.
Its fiscal policy will focus on targeted poverty alleviation, environmental protection and revitalising idle fiscal funds, so as to realise more efficient resources allocation.
In the real estate market, it will continue adopting differentiated control policies.
According to the policy that "housing is for living in, not for speculation", real estate policy is unlikely to be loosened in 2018. However, developing multi-tier housing leasing market and building a market-oriented housing leasing mode will be greatly supported and encouraged by the Government, and a breakthrough will be made in pilot projects including same rights for leasing and sales, common property rights and house property tax reform.
The country will continue its financial opening-up, including lowering market access thresholds for foreign investors and furthering capital account liberalisation — though the move will be taken realistically and cautiously.
GDP growth is estimated to reach around 6.7 per cent in 2018, down slightly from the previous year, but the quality of economic growth is expected to improve. The growth of investment will remain stable due to the restraint of fund sources of infrastructure investment, though consumption will maintain a growth of more than 10 per cent.
The growth rate of exports might be lower than that in 2017, due to the big base and possible slowdown of overseas direct investment.
The policy of "prevention of financial risks" and "deleveraging" sets the tone of a tight balance of liquidity.
New rules on asset management will be released in 2018, making it possible that liquidity will become tight temporarily.
With that, and the central bank's possible passive interest rate rise in 2018, market interest rates will remain volatile and are likely to go up at certain times. However, market interest rates are less likely to rise sharply, since the central bank's money market operations have become more forward-looking and accurate, and the co-ordination of regulatory policies has been enhanced after the establishment of the Financial Stability and Development Committee.
Exchange rates of RMB against USD are expected to fluctuate within the range of 6.50-6.75 in 2018. This is due to the expectation that China's economic stability will lay the foundation for RMB stability, and the possible negative impact on the United States' economy and treasury in the short term because of the US exit from QE policy and the Trump administration's tax reform.
Higher than expected
China reported a higher-than-expected economic growth in 2017, thanks to the higher contribution of net exports.
GDP grew 6.9 per cent year-on-year, higher than most economists' forecasts of 6.8 per cent, indicating visible economic recovery.
Judging from the three driving forces of the economic growth, stable consumption was the biggest contributor to GDP, accounting for 58.8 per cent; contribution of net exports to GDP rose from 6.8 per cent in 2016 to 9.1 per cent in 2017, becoming a critical factor for the higher-than-expected economic growth.
Infrastructure investment played a role of stabilising growth — investment in infrastructure, real estate and manufacturing grew 14.9 per cent, 7.0 per cent and 4.8 per cent respectively in comparison with the previous year. Optimised structure
In 2017, the new momentum of Chinese economy was experiencing a critical transformation from quantitative change to qualitative change. The value added in nine new economic industries — including energy saving and environmental protection, new-generation IT and information services and new materials — accounted for approximately one-third of GDP.
New business models have emerged in the information, rural, and green economies, including cross-border e-business, smart city and remote education and telemedicine.
The value added in high-tech and equipment manufacturing industries rose 13.4 per cent and 11.3 per cent year-on-year respectively.
Financial deleveraging
Liquidity was tight on the whole, and the mean of market interest rates went up. The amount of base currency kept dropping in 2017, but the central bank did not cut the reserve requirement ratio, indicating a clear policy orientation of the central bank to maintain a tight monetary balance. M2 (broad money) growth has been slowing since early 2017, with a balance of RMB167.7 trillion at the end of December, a year-on-year increase of 8.2 per cent and 3.1 percentage points lower than the growth of the previous year. The mean of market interest rates continuously went up while liquidity tended to be tight. The daily average interest rate of seven-day collateralised repurchase agreement in the interbank market rose from 2.55 per cent in 2016 to 3.35 per cent in 2017.
RMB gains
RMB appreciated against USD, easing the pressure of capital outflow temporarily. In 2017, the central parity rate and spot rate of RMB against USD appreciated 6.2 per cent and 6.7 per cent respectively.
With the appreciation of RMB against USD, China's pressure of outflow of funds declined.
This was consistent with the data of foreign exchange reserves: as at the end of December, China's foreign exchange reserves stood at USD$3.14 trillion, increasing month-by-month through the year.
Strong consumption
In 2017, the Consumer Price Index (CPI) grew 1.6 per cent year-on-year, with this growth fluctuating within a small band of 2 per cent since February.
The Producer Price Index (PPI) rose 4.9 per cent year-on-year, turning around a negative growth and maintaining its growth momentum since the beginning of 2017. However, it started to decline after reaching a peak of 7.4 per cent in March, due to the loss of momentum of raw material price hike caused by the de-capacity policy.
The year-on-year growth rate of Purchasing Price Index of Raw Material, Fuel and Power exceeded that of PPI, but the difference between the growth rates tended to decrease in 2017, suggesting an improvement in the operating status of industrial enterprises. Gross profits of industrial enterprises grew 21.9 per cent from January to November 2017, up 12.5 per cent year-on-year.
Bin Liu is deputy general manager ICBC New Zealand