Reflation ‘overarching theme’ in China for 2017

Qu Hongbin, chief economist for Greater China at HSBC, identifies five key areas that will determine the nation’s fortunes in the coming 12 months, with reflation being “the overarching theme”.”Strong infrastructure investment, a housing-market rebound, cuts to industrial over-capacity and rising global commodity prices helped turn a six per cent annual fall in domestic producer prices in 2015 into an increase in 2016. Raw materials such as iron ore, oil, coal and copper rose fastest,” says Mr Qu.”Easing deflation helps profit margins recover and reduces the real burden of debt. This especially helps state-owned enterprises, whose borrowings account for half of China’s total debt.

China’s expansionary fiscal policy to continue

“We expect the expansionary fiscal policy to continue into 2017, with infrastructure investment remaining key while stable demand and easing deflation encourage private-sector investment. Yet consumer-price inflation should remain below three per cent for 2017, with GDP growing at 6.5 per cent and no need to change interest rates.”The analysis says that, while private investment accounts for more than two-thirds of all Chinese investment, the report points out that such investment fell below 10 per cent in 2016. “That could have shaved 0.3 percentage points off nominal GDP growth. It also adversely affected productivity expansion. However, improving profits, prices and corporate confidence may avert further falls in private-sector investment. Lower taxes and social-security contributions would also help.”