To tackle head on the economic challenges China faces, this report suggests a 5C’s strategy.
- Promote Credibility: Improving investors’ faith in government policies will be pivotal to avoid volatility, maintain adequate capital inflows, and support private investment. Clear communication and a reasonable GDP growth target of +6% ± 0.5pp in 2017 are keys. We expect the economy to expand by +6.2% in 2017.
- Contain Credit risks: Corporate debt accounts for 170% of GDP, corporate bankruptcies are set to increase by +10% in 2017 (+20% in 2016). A tighter monetary stance in 2018 could initiate a gradual deleveraging. Supply growth would adjust at a slow pace as authorities will prioritize employment over overcapacity reduction. Reforms of SOEs – which are major suppliers - will likely be gradual.
- Reduce excess capacities in basic materials will remain a concern. Demand growth could be modest. Supply growth would adjust at a slow pace as authorities will prioritize employment over overcapacity reduction. Reforms of SOEs – which are major suppliers - will likely be gradual.
- Manage the Currency: The RMB could depreciate by -3% in 2017 against the USD. Pressures could mount due to a diverging monetary policy with the US, less favorable news, and higher returns on investment abroad.
- Focus on Commerce: USD-denominated goods exports may decrease by -7% in 2016. The US, which accounts for 18% of China’s exports, may increase trade barriers. China will seek new commercial drivers: a price competiveness boost (Market Economy Status), new customers and new investment revenues (One belt One Road), strong partnerships and political influence (Regional Comprehensive Economic Partnership).