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China’s Economy Defies Prophets of Doom

  • Economic sweet spot enables property curbs, tighter liquidity
  • Buildup of debt worries investors, says UBS economist Wang Tao

China has ended the year with its old growth engines roaring and new drivers like consumption in robust health, defying the prophets of doom yet again. Now, it confronts 2017 with fresh questions over the debt and stimulus used to underpin that stabilization.

Industrial output and fixed-asset investment maintained brisk expansions in November and retail sales accelerated, data released Tuesday showed. That’s resulted in an overall expansion of about 7 percent, according to a monthly tracker from Bloomberg Intelligence.

Aside from managing its ballooning debt load, China also faces a 2017 fraught with challenges -- from potential confrontations with U.S. President-elect Donald Trump over trade and Taiwan to the possibility that rising U.S. interest rates accelerate capital outflows. As the government prepares for an annual economic work conference as early as this week, the economy -- for now at least -- is in a sweet spot that’s given policy makers space to selectively tighten liquidity and begin to clamp down on surging property prices.

"Compared to January, when people thought China was having a hard landing and capital outflows were huge, this year is way better than expected," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "On the other hand, growth is still driven by the old economy, property. These numbers aren’t going to last forever."

Tuesday’s data showed an acceleration of retail sales, with help from car sales as buyers rushed to capitalize before tax incentives on purchases expire. Online sales also quickened last month, boosted by shopping bonanza Singles Day on Nov. 11.

For a detailed look at Tuesday’s economic data from China, click here

But state-owned firms and infrastructure investment continued to do most of the heavy lifting. State-owned investment was up 20.2 percent in the first 11 months from a year earlier and November fiscal spending rose 12.2 percent from a year earlier.

Meantime, exports have been cushioned by a weaker yuan and factory prices have snapped out of their deflationary funk, leaving the economy’s expansion on pace to land smack in the middle of the government’s 6.5 percent to 7 percent full-year objective.

With a crucial Communist Party Congress scheduled for late next year, policy makers are committed to providing enough stimulus to underpin a target for average annual growth of at least 6.5 percent to 2020. The downside of that is an ever increasing debt burden, with its risks deferred to the future.

‘Property Bubble’

"Policy support was financed by more debt, which worries investors," said Wang Tao, head of China economic research at UBS Group AG in Hong Kong. The "property rally also made domestic residents concerned about a property bubble."

Stimulus also may be needed next year to offset the likely drag on growth from curbs on home sales. Tom Orlik, chief Asia economist for Bloomberg Intelligence in Beijing, estimates real estate investment will slow to 1 percent in 2017 from 8 percent this year, resulting in a 1 percentage point drag on growth. Expiring car tax breaks will weigh on retail sales, too.

A front page article in the Communist Party’s flagship newspaper People’s Daily on Wednesday used the phrase new "fangwei" -- which translates as new orientation -- to reference measures to force some zombie companies to close and warned about a period of torture if a "reform window" is missed. Still, economists expect the imperative for rapid growth to prevail again next year.

"While it calls for the reduction of supply in some sectors, it also advocates pouring a flood of state-subsidized investment into new sectors, which inevitably will generate oversupply," said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance.

The economy’s 2016 stabilization looked far from inevitable in January, when capital outflows surged and the yuan sank as uncertainty over the nation’s exchange-rate regime roiled global markets. But instead of a hard landing, here’s what happened:

  • While the yuan weakened and foreign-exchange reserves continued to fall, capital outflows steadied after January’s scare. Policy makers have also begun tightening controls on capital outflows
  • Deep in a deflationary funk at the beginning of the year, factory-gate inflation rose last month to the highest since 2011 and the focus has shifted to how much inflation China may export to the rest of the world
  • Property market collapse? Instead, property prices surged, leading to the latest in a series of attempts over several years to rein them in

"The revival in growth has come once again from the clanking, energy-intensive industrial sector," Orlik wrote in a report. "How long does China have in this sweet spot of resilient growth and far-sighted policy? With risks from trade, real estate and autos looming, the answer might be ‘not very long.’”

— With assistance by Kevin Hamlin, Ting Shi, and Chris Bourke

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