China’s year-ender will be a tad better than expected, according to the World Bank. They raised their 2017 GDP forecast to 6.8% from 6.7% on Tuesday, citing rising household incomes and improving external demand for Made in China goods. Tuesday marks the second time this year that the World Bank revised China GDP growth higher. They started the year forecasting 6.5% growth.
“China has maintained growth resilience and gained reform momentum as the authorities have undertaken a host of measures aimed at reducing macroeconomic imbalances and limiting financial risks without notable impact on growth,” said John Litwack, World Bank lead economist for China. Net exports are adding some power to China. Business confidence has improved, job creation is still strong even as China automates and the renminbi appreciated against the dollar nearly 5% this year.
The bank is estimating 6.4% growth next year and 6.3% in 2019, mainly due to domestic policy-tightening. Financial authorities have been clamping down on banks, particularly smaller banks and their wealth management firm offshoots, for lackluster lending and investing practices. Deleveraging continues apace in China.
Back in 2007, China was “juicing” its economic growth with an undervalued exchange rate that made their exports cheaper than they are today in real terms. Net exports added 2.5 percentage points to China’s strong 2007 economic growth. China’s current account surplus reached 9% of GDP, similar to Germany’s current level. China was holding down, through regulation and outright quotas, domestic bank lending to avoid overheating in the economy. Credit was being held down in order to make it easier to hold the exchange rate down and allow China to grow through export growth. Deep stimulus in 2009 kept China afloat during the Great Recession in the U.S. and Europe.
“China’s fiscal stimulus in 2016 helped to take the pressure off the currency and thus allow China to be in a position in which domestic interest rates could follow the Fed,” says Neil MacKinnon, an economist with VTB Capital in London. Some financial pundits argued that the Fed and the People’s Bank of China cooperated in 2016 to limit the risk of an uncontrolled depreciation in the Chinese currency. That might happen again in 2018, in terms of the PBoC tracking the Fed with higher rates.
Chinese credit growth remains high and “evidence of any debt deleveraging is patchy,” MacKinnon says.
Outstanding bank loans reached 150% of GDP in November 2017. Total credit to the nonfinancial sector, including central and local government, is 242% of GDP, which is about 100% higher than it was prior to the global financial crisis. Toward the end of 2017, there was much focus on the increase in the Chinese 10-year-bond yield reaching 4%. This had less to do with conventional macro-fundamentals and more to do with Chinese banks facing funding pressures and disposing of their liquid bond holdings, according to the World Bank.
Sean Jutahkiti, head of Asian credit research at Neuberger Berman, thinks China will avoid a full-blown financial crisis. He was in China in September 2016.
“One year on and we are still more optimistic,” Jutahkiti says. “There are signs that the cleanup of the banking system is happening faster and smoother than expected, and financial risks are well under control.”
Third-quarter year-to-date results for Chinese banks have been strong, despite a period that saw heightened regulatory scrutiny and tighter funding. According to the China Banking Regulatory Commission, bank profits are up 7.6% this year.
“The quality of those earnings has been good due to banks de-risking their balance sheets by digesting nonperforming loans, increasing their provisioning, slowing growth, and reducing exposure to shadow banking activity,” says Jutahkiti.
Stronger banks could lead the World Bank to up the ante next year in terms of China GDP.
Nonperforming loans stabilized at 1.74% of all outstanding loans in the third quarter of 2017, after peaking at 1.76% a year earlier, according to the Chinese government, anyway.
The World Bank said today that the key downside risk to the outlook is related to leverage of the nonfinancial sector and uncertainty related to property prices. Despite the recent slowdown, credit continues to grow considerably faster than GDP. “A sharper slowdown in property price growth is likely to weigh on household consumption (through a wealth effect) and on the construction and real estate sectors,” report authors wrote.
Favorable economic conditions make this a good time for President Xi Jinping to force municipal leaders and their companies to reduce overcapacity, and pursue economic policies that target ‘better quality, more efficient, fairer, and more sustainable development,’ as Xi called for recently.