China’s Macroeconomic Analysis and Forecast for 2017 · to focus on preventing the risk of currency devaluation and capital outflow, speed up the pace of cutting industrial overcapacity

China’s Macroeconomic Analysis and Forecast for

2017

The international situation is chaotic

China's economy begins to stabilize in slowdown

Working Papers（No.77）

China and World Economic Research Center, Tsinghua University

Released on January 20, 2017

The international situation is chaotic, and China's economy

begins to stabilize in slowdown

■China’s economy:

Fixed asset investment - Infrastructure contributed nearly half in 2016 and

the growth will be rebound slowly2017.

Real estate - growth rates down, and faces adjustment.

Exchange rate and capital flow - devaluation outflow must be vigilant,

multiple measures to stabilize as expected.

Import and export - the global trade pattern has changed, China's exports

seek to stabilize in decline

Price index - CPI maintains a moderate upward, PPI’s rising trend keeps

unchanged

Consumption - Automobile production and sales growth slowed down,

while retail sales increased slightly

Cutting industrial overcapacity – more efforts to cut industrial overcapacity,

“hard bone” begins to appear

■The international situation chaos and the “Trump’s impact” shall be alert.

■Expert column

Daokui Li: Take multiple measures tocapital outflows and exchange rate

depreciation practically.

Gangming Yuan: Stabilize the growth only by rectifying major structural

imbalances.

Members of the Macroeconomic

forecasting project of CCWE:

Daokui Li, Gangming Yuan, Aobo

Like, Ming Feng, Shuyu Wu,

Jinjian Shi, Di Zhou, Xingye Jin,

Sijia Hu, Dapeng Chen, Chi Zhang,

Yifan Chen, Xushuo Wang.

Contact:

Tel: 010-62797782

Web: www.ccwe.tsinghua.edu.cn

GDP’s quarterly cumulative year-on-year growth rate

CPI’s quarterly cumulative year-on-year growth rate

Fixed assets’ quarterly cumulative year-on-year growth rate

M2 quarterly cumulative year-on-year growth rate

Source: National Bureau of Statistics, People's

Bank of China,

CCWE

Since the third quarter of 2016, China's economy has been slow to stabilize, taking

on steady and good momentum for the good. The economic growth continues to run

in a reasonable range. Retail consumption maintains steady growth; the import and

export decline narrowed year on year; Industry profits continue to improve. Overall,

China’s economy is still in the bottom-down phase, but the growth rate

Looking ahead to 2017, China will face a chaotic international economic and

financial environment. Represented by Trump’s taking the presidency, the

referendum in Italy and British’s exit from the EU, the nationalism and trade

protectionism begins to raise, the global economy, finance and trade patterns face

deep adjustment. From the domestic situation for 2017, to stabilize growth and keep

steady expectations and market will be the focus of economic policy; there is a need

to focus on preventing the risk of currency devaluation and capital outflow, speed up

the pace of cutting industrial overcapacity and inventory, and find ways to mobilize

private investment enthusiasm, to prevent the decline of foreign trade defeat.

Note: * represents the forecast value. Except M2, all indicators are the cumulative

year-on-year values from the beginning to the end of the year.

http://www.ccwe.tsinghua.edu.cn/

Center for China in the World Economy 19

I. China’s economy Since the third quarter of 2016, China's economy has been stabilizing in slowdown, and keeping steady to good momentum. The annual GDP

growth is expected to reach 6.7%, continuing to run in a reasonable range. In the first three quarters of 2016, China's single-season and cumulative GDP growth remained at 6.7%, falling by 0.2% compared with 6.9% growth rate in 2015. 2015’s GDP growth rate fell by 0.4% compared with 2014,

showing that the downward trend in GDP growth slowed down gradually. In 2016, consumption growth maintains steady growth and continuous

optimization of consumption structure, the annual retail sales is expected to reach 10.4% year on year, slightly lower than the 2015’s 10.7% level. Fixed asset investment grew 8.3% from January to November of 2016, down by 1.7% compared with the 2015’s 10% growth, but investment growth

has seen a gradual stabilization since August, especially private investment that heavily affects investment growth and its closely related investment

in the manufacturing sector, has shown signs of stabilization and slow recovery, gradually recovering from an all-year low levels to a growth rate of 3% -4%. In 2016, the annual import and export will continue negative growth trend, but in recent months, import and export decline has gradually

narrowed. In view of industrial production, since March 2016 above-scale industrial added value growth rate has remained at 6% or more, indicating

steady growth in industrial production; China Manufacturing Purchasing Managers Index (PMI) since August have been maintained at more than 50% of the expansion interval, indicating that the production slowdown in production stabilization. From the price level, since the fourth quarter the

year-on-year growth rate of consumer price index (CPI) comes back to the "2" era, the industrial producer price index (PPI) of single month since

September has been on positive rise, stepping out of the structural deflation interval. The above analysis shows that although the China’s economy is still in the bottom-down stage, but the rate of decline in the growth rate becomes narrowing, stabilizes in slowdown to the steadily good situation.

Looking ahead to 2017, China will face a chaotic international economic and financial environment. Trump after taking office, may implement

trade protection, infrastructure investment, and raise the Federal Reserve’s interest rates, fiscal stimulus and other measures, which will impact on the

global economy and financial markets. EU economic recovery is relatively fragile, and political elections, refugees, poor banking and conservatism

will bring uncertainties to the EU and global economic growth and financial stability. The differentiation between developed and emerging economies and within emerging economies will be further highlighted, and global liquidity may face short-term turning point. In short, the

international situation is chaotic. From the domestic situation, to keep steady growth and market, and to meet expectations will be the focus of

economic policy in 2017. Consumption growth will face the slowdown in disposable income growth, weakened automobile driving and other negative factors; foreign trade situation is facing changes in international trade patterns, trade protection trend rise and other challenges; whether

private investment growth steps out of low operating range will continue to be the biggest uncertainties in the speed of investment recovery. At the same time, the domestic foreign exchange market, bond market, banking and other financial market risks can’t be ignored and need to be cautious.

We recommend that the exchange rate depreciation and capital outflows should be highly vigilant and the foreign exchange market expectations

should be stabilized in a multi-pronged manner; strengthen effort to cut industrial production overcapacity and inventory and speed up the handling of bad debts of banks; create a favorable business environment, and try to activate and mobilize private investment initiative . If the policy and

adjustment in place in 2017, China's economy will remain moderate stabilization, stability in good trend.

Based on the above analysis, CCWE speculates that China's GDP growth rate will be 6.7% in 2016 and 6.6% in 2017.

1. Investment in fixed assets: Infrastructure contributed nearly half of in 2016, and the growth will slowly rebound in 2017 From January to November in 2016, the investment in fixed assets reached 5,308.8 billion RMB, up by 8.3% year on year. The investment had

stabilized at a level of more than 8% for four consecutive months, and the stage stabilization characteristics of investment had been further

consolidated. Fixed asset investment growth reduces from the level of more than 10% in the beginning of 2016 down to 8.3% over January-November, concluding the trend of high in the beginning but low in the end, consistent with our 2016’s second quarter report. Dramatic

decline in the growth rate of manufacturing investment and private investment is the main reason for the slowdown in investment growth throughout

the year, while infrastructure investment and other investments1 become the main force for stable investment1. From January to November 2016, the decline in manufacturing investment and private investment growth dragged down fixed asset investment by 1.5% and 4.5% respectively. From the

contribution to the growth of investment in fixed assets, the contribution rate of infrastructure investment and other investment is 40.8% and 31.2%

respectively, which together boosted the investment growth of more than 70%.

Figure 1 Investment in fixed assets and components’ year-on-year growth

1 Other investment is defined as: other investment = fixed asset investment - manufacturing investment - real estate investment -

infrastructure investment, calculated by January-November 2016 data, manufacturing investment, real estate, infrastructure and

other investments accounted for 31.6%, 17.3%, 19.7% and 31.4% of the total fixed asset investment, respectively.

Accumulated year-on-year investment

in fixed asset Accumulated year-on-year investment in manufacturing

Accumulated year-on-year investment

in real estate Accumulated year-on-year private

investment

Accumulated year-on-year private

investment in fixed asset

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Source: National Bureau of Statistics Since 2016, the regional differentiation of fixed asset investment growth is very obvious. In view of regional economy, investment growth in the

Northeast region in 2016 happens to cliff-type decline from -10.7% for 2015 to further decline in -32% for January-June 2016. Then decline

gradually narrowed to -24.7% for January to November, while the growth rate of investment in eastern, central and western regions has maintained a steady growth rate of over 10% since 2016 in spite of slight fluctuations, no significant decline compared to 2015. The investment growth in the

three regions has always been higher than the national average growth rate. Especially in the western region on the contrarian, the monthly

cumulative growth rate since 2016 has remained at 12.5% level, increasing by above 3% compared with 2015. The data analysis shows that from the perspective of regional economy, the decline of investment growth in northeast China is the major factor that drags down the growth of national

investment in 2016. The proportion of investment in fixed assets in Northeast China is 7.3% in 2015, down to 5.3% in January to November of 2016.

The cliff-style drop of investment growth in the northeastern region drags directly down the national investment growth rate by 0.88%, which could explain 46% of the decline in investment growth in 2016.

Figure 2 Comparison investment growth of fixed asset in four major regions

Source: National Bureau of Statistics Looking ahead to 2017, the growth rate of fixed asset investment will remain stable, steady in good trend.

In view of regional economy, the cumulative growth rate of investment in fixed assets in Northeast China is expected to be positive in the third

quarter to the fourth quarter of 2017, which will drive the national investment growth rate up by 1% or more. Judging based on two main aspects: first, since 2016, the State Council has introduced a new round of northeast revitalization strategy, including a number of supporting policies. The

three northeastern provinces also cooperate with the central policy to introduce a number of relevant policies for regional economic recovery and

revitalization. With implementation of these policies, the economic downturn in the northeastern region has been curbed as the Northeast fixed asset investment growth has been narrowed from the lowest value of -32% for January to June, 2016 to -24.7% for January to November, 2016, and the

trend of narrowing investment growth negative growth will continue in 2017; second, there was inflated statistics of Northeast China, the negative

growth of major macroeconomic indicators in 2016 has a certain relationship with the statistical data of “ruling out of inflation”. With gradual completion of the “ruling out of inflation” work and the low contrast base, the Northeast macroeconomic indicators in 2017 will be significantly

improved, and the cumulative growth rate of investment in fixed assets is expected to be positive from the third quarter to fourth quarter. From the main component of investment in fixed assets, the growth of manufacturing investment accounting for nearly a third in 2017 will

maintain a slow recovery trend, and the annual growth rate is expected to return to 6.5-7.5%. First, the PPI and CPI will remain modest growth in

2017, which will lead to further improvements in industrial profits, including manufacturing, and improved return on investment in the manufacturing sector. In addition, the Manufacturing Purchasing Managers' Index (PMI) in December 2016 was 51.4%, which was in continuous

expansion and more than 50% for five consecutive months. This also indicated that the manufacturing sector had some recovery signs. Second, tax

cuts and other cost-cutting measures will further benefit the manufacturing enterprises, bringing a momentum for new investment to enterprises. Although cutting industrial overcapacity is still the main task of economic work in 2017, we estimate that manufacturing investment in the major

overcapacity sector accounts for about 20% of the total manufacturing investment, which means that the cutting industrial overcapacity in

manufacturing sector has relatively small impact on manufacturing investment, while cutting industrial overcapacity leads to changes in supply and demand structure and price correction, which will also stimulate the quality investment in the excess capacity industry.

Infrastructure investment is still the most important force for stable investment and stable growth in 2017, and it is expected to maintain a high

growth rate of 18% to 20% for the whole year. Despite the current slowdown in revenue growth and fiscal revenue and expenditure contradiction is more prominent, taking into account that the 2017’s budget deficit is likely to further expand , the current capital investment sources of financial

budget funds not more than 20%, a large number of other funds mainly from local government and enterprises self-financing, bank loans and PPP

financing, the financial revenue and expenditure problems will not constrain the high-speed growth of infrastructure investment by large. By the end of 2016, the National Development and Reform Commission has promoted three batches of PPP projects with 6.37 trillion RMB in total, expecting

effective PPP projects of 3.8 trillion RMB in2017, which will effectively support the rapid growth of infrastructure investment. In addition, since

October 2016 the property market regulations make the commercial bank mortgage funds gradually shrink, infrastructure investment is likely to become the target for the funds.

Influenced by the new property market policies and inhibition of capital bubbles, real estate investment will gradually slowdown in 2017, the

annual growth rate is expected to be about 2.5%. Real estate investment trends will be below for a detailed analysis, not repeated them here. The current private investment growth is temporarily stabilized, but still hovering around the low level of 3%, in 2017 policies need to focus on

efforts to encourage and stimulate private investment to pick up. Private investment accounted for more than 60% of the total investment, its growth

rate represents the strength of spontaneous growth of the economy, only the private investment stabilizes the real recovery before it leads the whole investment to really stabilize and recover, otherwise by virtue of infrastructure and real estate-driven investment, the foundation is still relatively

Nationwide Eastern Central Western Northeast


fragile. Also this is the key point for recovery of endogenous growth of China's economy.

Based on the above analysis, CCWE predicts fixed asset investment growth rate of 8.3% in 2016 and 8.9% in 2017.

2. Real estate: growth rate declines and faces adjustment 2016: from release of demand to decline in growth

In 2016, China's economy maintained stable running, and the real estate market made an important contribution. According to the

information released by the Bureau of Statistics, real estate contributed around 8% to economic growth in the third quarter, and 13.7% to fixed asset investment for January to November.

Sales: growth begins to go down from a high level

The sales area of real estate reached 1,358,290,000 m2 from January to November this year, up by 24.3% year on year but down by 2.5% compared to and the previous month, nearly 20% higher than the end of 2015. Among them, the residential sales area increased by 24.5%,

office building sales area, increased by 31.4%, and commercial sales area of business occupancy increased by 17.5%.

The sales of commercial housing reached 10250.3 billion yuan from January to November, up by 37.5% year on year, but down by 3.7% compared to the previous month, and over 20% higher than the end of 2015. Among them, residential sales growth accounts for 39.3%,

office building sales growth, 46.5%, commercial sales of business occupancy, 20.1%.

In November, the average price of sample houses from hundreds of cities was 12,938 RMB per square meter, up by 18.7% year on year

and 0.50% higher than that in the previous month, up by 0.88 month on month but down by 0.77% compared to the previous month.

Good sales benefited from full demand release. From September 2014 to February 2016, four easing policies were introduced,

including release of property-purchasing limitations, down-regulation of down payment ratio, interest rates, and tax reduction, intended to

go all out to reduce the inventory. First, the purchase threshold fell and directly boosted release of rigid demand. Second, for second suite, reduction of down payment and deed tax formed a good promotion for house improving demand. Finally, two factors stimulated the release

of investment demand, one is the expectation of house prices, and the other is the asset allocation requirements due to capital adequacy.

Since April 2015 this round of rebound, house prices have been stepping out of rising for 16 consecutive months; meanwhile, the expected annualized rate of return of financial products and 10-year treasury yield to maturity is also declining. Expectations on continuous rise of

housing prices and flush of capital and other channels with the investment rate of return gradually lowering promote the current round of investment demand to continue growth.

Figure 3 Sales of real estate Figure 4 Prices of real estate

Source: National Bureau of Statistics , wind database Source: National Bureau of Statistics ,wind database

The effect by reduction of inventory is remarkable

Overall, good sales help the inventory to reduce with satisfactory results, but the cycles of reducing residential and non-residential real estate

inventory have big differences2. In November 2016, according to the “for sale + under construction” measurement, the broad cycle of reducing real estate inventory goes down to 50 months, compared with the same period of 2015, 2014, and 2013, decreased by 10 months, 13 months, and 2

months respectively, with remarkable effect.

In view of categories, the stock-to-sales ratio of residential house in November 2016 was 39 months, non-residential house, 125 months. Although both are at historically low levels, there is a significant discrepancy between them, which means that non-residential de-stocking pressures

in the real estate market are much higher than residential inventory. In view of cities, their differentiation is more obvious. It’s most obvious decline for first and second tier cities in real estate stocks, and in these

cities housing prices are also highly rising; While the statistics of the 20 third-tier cities, the period for reducing the inventory varies but the average

is still much higher than first and second-tier cities. Considering there are few Northeast and Northwest cities with high stock-to-sales ratio, the actual ratio of third-tier cities maybe even higher.

Figure 5 Time required to resolve inventory (unit: month, red dotted line marked the stock-to-sales ratio of Novembers over the years)

2 CCWE use broad stock-to-sales ratio to reflect the real estate inventory the situation and the time required for resolving inventory.

The broad stock-to-sales ratio is the ratio of the stock of real estate and the sales over a certain time (usually one month), which is

calculated by the following formula: the broad stock-to-sales ratio of real estate = (real estate for sale area + area under construction)

/ average monthly sales area. Where, the average monthly sales area of commercial housing is calculated by the moving average for

the last 3 months; the area of commercial housing under construction includes construction area of residential house, office buildings

and business operating house.

Year-on-year cumulative sales area of real estate

Year-on-year cumulative sales of commercial housing

Price index of 100 cities (year-on-year)

Price index of 100 cities (month-on-month)


Data source: WIND database

Investment: Cumulative growth begins to slow down From January to November, the accumulative investment of real estate across China reached 933.87 billion RMB, up by 6.5% year on year, but

down by 0.1% from the previous month, and 5% higher than 2015. Among them, commercial residential investment was 6258.8 billion RMB, up by

6.0%, accounting for 67.0% of real estate development investment.

From January to November, the land acquisition area by all real estate development enterprises in China reached 190 million m2, down by 4.3%,

but still maintains a sustained negative growth momentum.

From January to November, the new construction area by all real estate development enterprises in China reached 1.513 billion m2, up by 7.6%, but

down by 0.5% from last month. The area of completed housing reached 770 million m2, up by 2.9%, but the growth rate down by 0.4%.

Figure 6 Accumulative year-on-year real estate investment Figure 7 Area of purchased land and new construction

Source: National Bureau of Statistics wind database Source: National Bureau of Statistics wind database

2017: Enter the downstream channel

We believe that this round of real estate market rally may peak in 2016 and will face greater downside risks in 2017, including the following reasons:

All-round tightening policies compress the demand

The limitation of property purchase and credit is unprecedented, affecting a quarter of the sales area, more than one-third of the real estate

investment, and nearly half of the real estate sales. More than 20 cities during the National Day restarted or updated the purchase limitation policies, aiming at curbing the local improvement demand for two and more suites and investment in household by persons with foreign household

registration. According to our calculations, in these purchase-limiting cities, sales area of real estate accounts for 25% of the national real estate sales

area, 36% of the national investment, and 48% of sales. Since then, some hot cities continue tightening policy to make a second adjustment, where in the industrial policy, t the purchase restriction policy is strictly implemented to raise the threshold for house purchase.

In addition, the 2016 Central Economic Work Conference pointed out that “the house is used for living in, not for speculation”, showing a big contrast to the real estate policy of “reducing inventory” last year. In addition to the policies on suppressing the demand, like “control currency at

macro-scale level” and “strictly restraining flow of credit into house speculation”, there are other ones such as “Increase land supplies and the

proportion of residential land to revitalize the urban limits and offset the land use” that cause the property market cool down. In 2017 with the new policy tone of “to curb asset bubbles, prevent financial risks”, the easing policy for the real estate will no longer exists.

In view of specific impact of the policy, first of all, the tightening regulation rises the down payment proportion of first suite to 30%, and the current house prices after six months of growth are in a higher position, making a substantial increase in the purchase threshold for rigid demand.

Moreover, for the past 11 months of this year, the release volume of the industry and the commercial housing sales area in second and third-tier cities

Broad stock-to-sales ratio

of residential house Broad stock-to-sales ratio

of non-residential house

Area of purchased land (year on year)

Area of completed house(year on year)

Area of new construction (year on year)


achieved a highly accumulative increase of 30.81%, 42.39% and 33.05% respectively. The rigid demand has been fully released. Therefore, as the

purchase threshold rises and the large volume releases previously, the rigid demand will gradually lose support in the second half of small cycle. In addition, for improvement demand for second suite, the down payment ratio will cause a big influence. Finally, strict house purchase limitations in

first and second-tier cities make some of housing investors lose their eligibility and constitute certain restrictions. After this regulation, 70 large and

medium-sized cities in October new showed decline in the price index of new construction house. The market forms a more consistent expectation for next round of house prices, and investment demand will also enter the downstream channel. Under the impact of policies such as all-round

compressed demand and increase of land supply, the real estate market is difficult to form a rally in 2017.

Mortgage leverage rose quickly

For the past four years, residents purchase lever has been accelerated: in 2012 the new personal purchase loans accounted for only 17% of

commercial housing sales, however, this value soared to 47% by the end of 2016, meaning that half of the residents' purchases in the first three quarters of this year came from leverage. As a result, residents' demand for housing is greatly affected by the bank credit policy, which makes the

impact of the current strict credit limit policy be further amplified. In addition, the purchase leverage in recent years has a substantial increase rapidly,

narrowing the space for further leverage enhancement. In current view, the probability of continuing to vigorously increase lever is small, and it is difficult to form an effective support for real estate sales.

Figure 8 the first three quarters of the residents purchase leverage over years

Data source: WIND Database

The willingness of housing investment declines In November 2016 the broad stock area (ie, for sale + under construction) went up to 80 million m2, of which residential stock area, 5.5 billion

m2, and non-residential stock area, 2.5 billion m2. Although the current real estate sales is relatively low, but the absolute value of the stock area hit

the highest level in the history. With the sales-side downturn expectations for 2017, the real estate companies don’t want further investment very much.

For example, in the first few rounds, when funds from other real estate development sources, namely sales collection payment declines, housing enterprises’ self-financing funds has not been reduced and increased instead, which shows to some extent shows that they are optimistic about the

future market. In the current cycle of decline, the two trends are the same, indicating that expectation of housing enterprises about the future market

have begun to decline, and so do the willing of investment.

Figure 9 Sales collection payment declines along with housing enterprises’ self-financed fund, indicating that their wiliness of investment will

weaken.

New personal purchase loans / real estate sales


Based on the above analysis, CCWE forecasts that the real estate investment growth will decline to about 2.5% in 2017.

3. Exchange rate and capital flows: Currency devaluation and capital outflow must be paid attention to, multi-pronged measures are taken to stabilize expectations

Since October 2016, the RMB foreign exchange market happened large fluctuations again. On December 30, the RMB exchange rate against

the US dollar was 6.95, hit a historically lower level for this year, compared with 6.56% depreciation at the beginning of the year, and the

depreciation reached 4.02% from November to December. By November 2016, the official foreign exchange reserves fell 278.8 billion US dollars

compared that by the end of December 2015. As estimated by the China and World Economic Research Center, Tsinghua University (CCWE), the

broad capital outflow was 5,186 US dollars from May to November 20163, mainly due to the transfer of funds by the corporate sector through the current account channel. In December 2016, the Federal Reserve landed a policy to raise interest rates, in the context of the US economic recovery,

a new round of interest rate interval officially opened, which may lead along with Trump's fiscal expansion policy to the expectation of tightening

US dollar liquidity. Therefore, despite the outflow pressure is much smaller than 2015, the market’s worry of fluctuations in RMB exchange rate and capital flows caused by strong dollar rise again.

Although in the long run, China's macroeconomic fundamentals do not support a substantial devaluation, the exchange rate itself is the price of foreign exchange, affected by supply and demand. In the short term, because of expected changes, it’ll greatly deviate from the underlying value, and

this is the natural attribute of financial asset prices. At present, due to that economic growth has not bottomed out, stock and bond markets are

fluctuating violently, and the international interest rates gradually rise, the international investor demand for RMB growth is limited. Once the exchange rate devaluation and capital outflows pressure interact to form a feedback cycle, domestic investors will exchange their RMB assets on

hand into US dollars assets to earn income. At that time, China’s money stock of 21 trillion dollars will become a potential supply of RMB,

compared to which 3 trillion US dollars of foreign exchange reserve is nothing but a drop in the bucket. The residents’ converting their assets in foreign currency will have a serious impact on domestic savings and investment balance, and cause an immeasurable impact on the real economy.

We believe that in the face of foreign exchange market risk, the monetary authority should be more decisive to take actions to resolutely reverse

the expected depreciation of the market. On one hand, capital flows should be properly managed. In particular, it is necessary to intensify reviewing

the reality of exchange settlement by current accounts, especially trade items, to prevent speculators from borrowing trade channels to transfer capital;

to strengthen flowing foreign exchange assets management like foreign currency deposits, loans and other; to carefully assess the risk of direct investment in RMB to avoid a large number of RMB outflow causing a pressure of devaluation on the offshore market. The enterprise sector is the

focus of capital flow management, but the operation shall grasp big issues while relax control of small ones, releasing real small foreign investment

and focusing on large capital outflows. To avoid making a fuss in the residents’ currency exchange management, stabilize public expectations and eliminate panic.

On the other hand, to use a variety of tools to stabilize the offshore and onshore spot and forward markets, and use offered rates and other market means to increase speculative costs, making the use of foreign exchange reserves play a defensible role. Without capital flow management,

foreign exchange intervention will soon run out of the reserves; without stable exchange rate markets, a capital flow management against

expectations will inevitably be cost-inefficient. Therefore, only capital flow management and foreign exchange market intervention are both carried out can the current round of foreign exchange market risk be effectively resolved.

Current account’s settlement and sale of foreign exchange is the main channel for capital outflow

3 According to the CCWE’s measure, broad capital outflow = reduction in foreign exchange reserves + trade surplus (including

trade in goods and services) - external reserve devaluation caused by fluctuation of exchange rate. Among them, from January to

November 2016, the trade surplus accumulated to 269.5 billion US dollars, foreign exchange reserves reduced due to fluctuations in

the US dollar against other currencies, amounting to approximately $ 29.6 billion.

Source of fund for real estate development:

self-financing fund, year-on-year Source of fund for real estate development: other

funds, year-on-year


After the “8.11 exchange reform” in 2015, the capital outflow pressure began to rise sharply. By August 2015, the deficit of banks’ spot current

account settlement and sale of foreign exchange reached 93.3 billion US dollars, with an increase of nearly 70 billion compared to that in July. After a short-term calm, the settlement deficit in December 2015 once again enlarged as to the scale of more than 50 billion US dollars, and then it began a

smooth fall. For the past three months, the deficit of current account settlement and sales of foreign exchange has been continuing to expand as the

net current account sales of foreign exchange in November reached 20 billion US dollars, close to that at the beginning of the year. It is not difficult to find out that the enlargement of the deficit in settlement and sale of foreign exchange in current account and financial account has some

synchronism with the fluctuation of the exchange rate market. However, in view of fluctuation range, the settlement and sale of foreign exchange in

current goes far beyond the capital and finance projects. Therefore, we believe that the current account is the focus of cross-border capital management.

Figure 10 Broad capital outflow estimation Figure 11 Balance of spot foreign exchange settlement by banks on behalf of clients

Data source: WIND database, CCWE calculation Data source: WIND database, CCWE calculation

The current account is broken down into goods trade and service trade, as shown in Figure 5 and Figure 6. In August 2015, as the settlement and

sale of foreign exchange for goods trade turned unfavorable, there was a substantial increase in sale of foreign exchange for goods trade, and trade import foreign exchange amount went beyond the number of import of current month, showing decoupling of foreign exchange sales and trade

behaviors, an important channel for capital flows. In contrast, the settlement of foreign exchange declined to some extent even ignorable. The

settlement and sale of foreign exchange for service trade has been always unfavorable, and the proportion of foreign exchange settlement continued to decline, while the proportion of foreign exchange sale increased significantly in January 2016, but recently it kept steady. Although the deficit of

tourism accounts for a large proportion of the service deficit, it fluctuate moderately and thus isn’t the main channel for last round of capital flows. In

November 2016, the deficit of current foreign exchange settlement increased to 20 billion US dollars again, which should be taken seriously.

Capital outflow in the financial account caused by flowing capital

Estimation of

capital outflow

(100 million US

Dollar)

Net settlement

and sale of

foreign exchange

by bank on

behalf of clients

after adjustment

of forward

contract

(settlement –

sale, in 100

million US

Dollar)

Balance of settlement and sale by banks on

behalf of clients: common items

Balance of settlement and sale by banks

on behalf of clients: capitals and

financial projects

Figure 13 Balance of spot foreign exchange

settlement and settlement by banks on behalf

clients: trade in services


settlement and settlement by banks on behalf of

clients: trade in goods

Balance of settlement and sale of foreign exchange by banks on behalf of clients: cargo trade

Percentage of foreign exchange settlement of cargo trade per month, 100 million US dollar

Percentage of foreign exchange sale of cargo trade per month, 100 million US dollar

Balance of settlement and sale of foreign exchange by banks on behalf of clients: service trade

Balance of international service trade: travel: current number Percentage of foreign exchange settlement of service trade per month, 100 million US dollar

Percentage of foreign exchange sale of service trade per month, 100 million US dollar


settlement by banks on behalf of clients: capital

financial projects

Figure 15: Balance of international payments, moving average standard deviation (MASD) of

capital and financial projects financial projects


Data source: WIND database Data source: WIND database

By breaking down banks’ settlement and sales of foreign exchange under financial accounts by capital categories, we found that the flow of capital caused by direct investment and security investment was relatively low, both in terms of size and fluctuation. This is in line with quarterly

balance of international payments. Using the data from balance of international payments to calculate the moving average standard deviation of the

components of the capital and financial projects, we found that other investments have risen sharply since 2007, and much higher than the other components. It can be said that the difference between foreign exchange settlement and sales of financial projects is mainly driven by other

investments, while other investments are mainly composed of relatively high liquidity such as money savings, loans, trade credit and other assets.

Figure 9 and Figure 10 show that liquidity capital flows are highly correlated with exchange rates and spreads. In other words, we can see that liquidity is the most important factor in determining the liquidity of capital. In the context of domestic and foreign monetary policy differentiation,

the interest rate parity will continue to drive liquidity capital to pursue high returns from overseas markets. As a result, regulators need to pay

particular attention to cross-border flows of short-term capital, such as deposits and loans, which are highly liquid.

Figure 16 Working capital and exchange rates Figure 17 Working capital and interest rate spread

Data source: the Foreign Exchange Administration, CCWE’s calculation Data source: Foreign Exchange Administration, CCWE’s

calculation

RMB outflow is also an important way of capital outflow

Figure 18 RMB payment in international transactions (US $100 million) Figure 19 RMB deposits in Hong Kong (RMB100 million)

Balance of settlement and sale of foreign exchange by banks on behalf of clients: capital and financial projects

Balance of settlement and sale of foreign exchange by banks on behalf of clients: direct investment

Balance of settlement and sale of foreign exchange by banks on behalf of clients: security investment Balance of settlement and sale of foreign exchange by banks on behalf of clients: other investment

Capital and financial account

Direct investment

Security investment

Derivatives

other investment

Note: FA_A_Oth is the “other investment” in the balance of

international payments; FA_Liq is the sum of money savings and loans in “other investment”; CNY is the onshore RMB exchange

rate; CNH is the offshore RMB exchange rate

Note: FA_Liq is the sum of money savings and loans in “other

investments”; ShiHi6m is the six-month Shibor-Hibor interest rate spread; ShiHi3m is the three-month Shibor-Hibor interest rate spread;

ShiLi6m is the six-month Shibor-Libor interest rate spread


Data source: the Foreign Exchange Administration Data source: WIND database

In addition to the capital outflows involved in the sale and settlement of banks, a large amount of capital flows out directly in the form of RMB.

As shown in Figure 11 and Figure 12, the difference between payments received and paid from domestic banks on behalf of clients for current

account, capital and financial projects has been negative since August 2015 and has shown a significant increase in the sharp depreciation of the exchange rate, indicating that a large number of RMB currency exports to overseas through trade and financial channels. From January to November

2016, the cumulative outflow of RMB reached US $ 305.5 billion. After outflow, RMB complete the exchange in the offshore market, which can be

caused a pressure for the offshore market depreciation of the RMB, also part of the capital outflow that cannot be ignored.

The structure of capital outflows

According to CCWE’s estimation, assuming that the exchange settlement below the trade surplus and the exchange sales beyond the service trade deficit are translated into US dollar-denominated capital outflows hold by private sector, a capital outflow amounted to US $ 338.9 billion was

hidden under current accounts happened from January to November 2016, accounting for about 67% of the total outflow. By asset types, the working

capital like deposits out flowing from capital and financial accounts contributed US $ 119.2 billion from January to November, 2016, about 24% of total outflows; foreign direct investment contributed a net capital outflow of US $ 29.3 billion, about 6% of total outflows, securities in US dollar

(including bonds and equities) contributed a net capital outflow of US $ 16.8 billion, about 3% of total outflows. Since the “8.11 exchange rate

reform” in 2015 entered and the RMB fell into the devaluation range, capital outflow still takes trade as the main channel, and the capital outflow under financial projects also accounts for a part that can’t be underestimated.

Figure 20 Capital outflow by BOP projects Figure 21 Structure of capital flows by asset holdings

Data source: Wind database, CCWE’s calculation Data source: the people’s bank of china, CCWE’s calculation

It is also noteworthy that profiling capital outflows by asset holders, we find that the capital outflow from the resident sector is much lower than

in enterprise sector. As shown in Figure 14, the capital outflow from resident sector accumulated to US $ 94 billion from January to November 2016, while the number for enterprise sector was about US $ 423.6 billion4, indicating that the current capital outflow is still mainly from enterprise sector

in which non-financial institutions lead this round of capital outflows in name of import and export settlement, external debt repayment in US dollar

exchange. Guan Tao (2016) believes that the domestic enterprises’ accelerating the repayment of external debt is the main channel for capital outflows. He found from foreign currency loan-to-deposit ratios that the external debt leverage of enterprise sector has continued to decline in recent

years and the ratio had fallen to 2007 economic crisis levels by December 2015. CCWE's calculations also support this argument, and the study

found that affected by continuous RMB depreciation as expected, enterprise sector speeds up the process of external debt repayment. In November 2016, the enterprise sector’s net repayment for foreign debt amounted to about 80 billion US dollars. In addition, many scholars believe that part of

the capital outflow transfers from the central bank's official reserves to the resident sector reserves, namely “stockpiling foreign exchange among the

people”. However, according to CCWE’s calculation, by the end of November, the resident sector has increased its holdings of US $ 28.6 billion by the end of 2015, accounting for only 5.5% of the total capital outflow, indicating that the vast majority of capital outflows have not been converted

into resident deposits but transferred overseas through the enterprise sector’s trade and investment projects.

4 If the capital outflow is calculated by asset holders, we made the following assumptions: 1. under current accounts, the capital

outflow hidden in trade in goods was an intention of enterprise sector, while the capital outflow hidden in trade in service (mainly

tourism) was an intention of residents. 2. The capital outflow involved securities investment and direct investment was performed by

the business sector on the grounds that securities investment mainly provided a QDII channel for capital outflow to financial

institutions, while direct investment is mostly executed by state-owned enterprises or private enterprises; 3. Only considering the

domestic deposit for other investments, the residents’ deposit is lead by residential sectors, non-financial enterprises’ deposit and

credit is dominated by enterprise sector.

Balance in RMB (right axis)

Revenue in RMB

Payment in RMB

China Hongkong: Bank deposit: in RMB (100 million Yuan)

China Hongkong: Bank deposit: total remittance in RMB related to

cross-border trade settlement

2015 Jan-Nov, 2016

100 million USD Trade Deposit Credit

Direct

investment

Security investment

Cargo trade Service trade

Frequent items Direct investment/Security

investment /other investment

Capital and financial projects Residential sector Enterprise sector


The interbank market and the derivatives market are the focus of foreign exchange intervention

In view of the whole foreign exchange market, the total trading volume keeps a steady declining since it peaked in August 2015, but in

November 2016 this number ascribed again to 2.3 trillion US dollars in November 2016. In view of the structure, the proportion of transaction on

interbank foreign exchange market continued to rise, from 66% in early 2015 rose to the current 87%. In terms of trading items, spot trading accounts for from 55% down to 50%, options trading rise from 3% to 7%, and still on the rise. Based on the above analysis, we believe that the

management of individuals and enterprises’ capital outflow were effective in the early stage. The current depreciation pressure does not cause a huge

capital flow in the non-financial sector, but with the enlargement of the foreign exchange market, the capital flow pressure still exists. The management of capital flows should include the interbank market and the derivatives market.

Figure 22 Transaction at foreign exchange market volume (in billion US dollars) Figure 23 Proportion of transaction at foreign exchange market

Data source: Administration of Foreign Exchange, People’s Bank of China Data source: Administration of Foreign Exchange, People’s

Bank of China

In summary, we believe that the main channel for capital outflows is the deficit in current account settlement and sale of foreign exchange under

banks’ policies. Despite the data on the current account settlement and sale of foreign exchange is stable recently, it still need attention to strengthen

reviewing the reality of foreign exchange settlement and sale of trade. At the same time, in the background of the differentiation of monetary policies,

it shall strengthen the management and guidance of working capital and strictly supervise the funds that are traded in the offshore market in the form

of RMB. Finally, it shall strengthen the RMB forward market intervention. In practice, we should focus on the management of large capital flows in

the enterprise sector, and carefully handle the policy adjustments related to the residential sector to stabilize expectations. Only the price and the quantity tools complement each other can be fundamentally reversed the expectation for excessive devaluation of RMB.

4. Import and export: the global trade pattern has changed and China's export keeps steady but slightly declines As one of the driving forces for China's high economic growth, China’s import and export performance is not very good in 2016. According to

the data from the General Administration of Customs (in US dollar), the cumulative year-on-year growth rate of China's imports and exports has

been negative since January 2015, and the total import and export volume from January to November 2016 decreased by 7.3%. The accumulative import amounted to US $ 1,416,869 million, down by 6.5% in this period, and the accumulative export amounted to US $ 1,888,945 million, down

by 7.9%, with a trade balance of US $ 4,720,760 million. As shown in Figure 17 and Figure 18, China's imports and exports fell into the lower level

at the beginning by year-on-year comparison, and the decline began to narrow gradually since March. Besides, China's import has turned positive and rose to 4.7% on a year-on-year basis, hitting the highest level since 2016.

Figure 24 Accumulative year-on-year comparison of import and export Figure 25 Month-on-month comparison of import and export

Inter - bank foreign

exchange market Spot

Options Foreign exchange and

currency swaps


Data source: WIND database Data source: WIND database

Import: industrial import fell significantly Imports of electromechanical and audiovisual equipment, spare parts and accessories from the developed economies (the United States, the

European Union and South Korea) in the months from January to November, and minerals from Southeast Asian countries (Philippines, Malaysia

and Indonesia) are the largest contributors to China's import decline. Table 1 shows the contribution rate of China's import category and trade classification. First, we classify all 22 categories of imports into three types5: industrial, consumer and other imports. The decline in industrial

imports in 2016 is the most important reason for China's import weakness. Among the industrial imports, three largest decreases: “mineral products”,

“machinery and electronics, audiovisual equipment and parts, accessories” and “base metals and their products”. The largest decline in consumer imports was “jewelry, noble metal and its products”, “imitation jewelry, coins”, “optical, medical equipment”, “watches and clocks, musical

instruments” and “plant products”.

Among the industrial imports, the category of “mechanical, electrical, audiovisual equipment, parts and accessories” include mechanical

instrument and devices and parts, electrical motors, electrical equipment and parts. The “mineral products” include ore, fossil fuels, etc. The “base

metal and its products” include steel, copper, nickel, aluminum and their products. These three categories of imports can be seen for industrial production. Therefore, we believe that the decline in industrial imports mainly has a relation with the 2016 annual domestic policy of “cutting

production overcapacity” and the poor performance of the manufacturing sector, industrial enterprises and related manufacturing import demand

reduced. In the fixed asset investment section of the report, we forecast that the growth rate of manufacturing investment, which accounts for nearly one-third of the total investment in fixed assets, will maintain a slow recovery trend. Since the third quarter, domestic PMI and PPI have performed

well, in 2017 the prices of bulk products will be on the rise. These factors will help pick up imports to some extent. However, for the section of

“cutting production overcapacity” in the report, we forecast in 2017 it’ll be intensified, the demand from related enterprises on raw materials and equipment will continue to decrease. Combined with the above analysis, we believe that in 2017 the performance of industrial imports will be a

slight rebound.

In consumer imports, the decline mainly involves jewelry, watches and clocks, musical instruments and other relatively expensive consumer

goods. Moreover, according to the import volume index, you can find these three types of products also declined in the number of imports.

Combined with the consumption part of the report below, we can find the “gold and silver jewelry” among total social consumer goods negatively grew year on year from January to November, while the rest of consumption products grew positively. Therefore, we believe that the first reason for

decline in consumer imports is the slowdown in household income growth, and the extrusion effect derived from real estate loans passed to the

demand for import of precious consumer goods, “gold and silver jewelry”. Another reason was that the attractiveness of imported products is

declining, and the competitiveness of domestic products is on the rising. For example， on China's mobile phone market, Millet, Huawei and other

domestic mobile phone， their market share and sales revenue has an excellent performance, with a strong competitive edge and able to compete

with imports of Apple and Samsung mobile phones.

Based on the above analysis, CCWE speculates that the cumulative annual growth rate of imports will be -4.9% for 2016 and -0.5% for 2017.

Table 1 Contribution rate of import category and trade classification

Import category Contribution Percentage

By category

The largest contributor to the classification Percentage of contribution

by category

Industrial import

-5.18%

Mineral

products

-1.91%

Mechanical and electrical, audio-visual equipment and parts,

accessories

-1.74%

5 The specific criteria are as follows, industrial imports are: mineral products, electrical and mechanical, audio-visual equipment

and parts, accessories, base metals and their products, plastics and their products; rubber and its products, the chemical industry and

related industrial products, textile raw materials and textile products, weapons, ammunition and parts, accessories. Consumption

imports: jewelry, noble metals and products, imitation ornament, coins, optical and medical devices, watches and clocks, musical

instruments, plant products, vehicles, aircraft, ships and transport equipment, leather, fur and their products; saddler and harness,

travel goods, handbags, animal and vegetable oils, fats and waxes, refined edible oils and fats, wood pulp, waste paper, paper,

cardboard and products, food, beverage, wine and vinegar, tobacco and products; works of art, collectibles and antiquities; shoes and

hats umbrella, processed feathers and their products, man-made flowers, human hair product, other miscellaneous products, wood

and products, charcoal, softwood, knits, animal products, stone materials, gypsum, cement, asbestos, mica, and mica products,

ceramic products, glass and its products. Other imports are: special trade goods and unclassified goods.

The cumulative amount of import

and export year on year

The cumulative amount of export

year on year


year on year


and export month on month

The cumulative amount of export

month on month


month on month


Base metal and its products -0.58%

Consumer goods

imports

-1.90%

Jewelry, noble metals and products; imitation jewelry; coins -0.92%

Optical, medical and other equipment; watches; musical

instumentinstruments

-0.45%

Plant products -0.41%

Other imports 0.75%

Special traded goods and unsorted goods 0.75%

Data source: Wind information, CCWE’s calculation. Figure 26 Import quantity index

Data source: WIND database

Exports: the “re-industrialization” policy of the United States enters into force, quietly changing the pattern of trade

In terms of exports, Table 2 shows the proportion of exports to major economies and contribution rate of trade classification. From January to

November, the accumulative growth of China's export to the world's major economies was mostly negative. Europe, Japan and other developed economies is still in the quagmire of economic growth in 2016 and external demand declined; South Africa and Brazil, two BRICS countries,

Malaysia, Singapore and Indonesia and other ASEAN countries were all encountering slowing economic growth. China’s exports to these countries

also declined. Further analysis shows that mechanical and electrical equipment, audio-visual equipment and parts contributed the largest part to the decline. Therefore, we believe that the first reason for the decline in China's exports is that the global industry, manufacturing performance is weak,

the world's economic recovery is slow, and some developed economies deep in the quagmire, some emerging market countries are slowing down,

declining in the demand.

The United States is China's most important foreign trade partner, the accumulative growth rate of China's exports to the United States in the

period from January to November was -6.8%, and the exports to the United States accounted for 18.45% of China's total exports. Data from the United States, the US total imports fell 4.1% in the period from January to October. For this phenomenon, the analysis is listed as follows:

Taking into account the exports to United States and the EU accounts for similar share of China’s total exports, and their economic development, economic volume and market structure are relatively similar, according to the WEO predict of the IMF, in 2016 the EU’s GDP growth rate (1.9%)

will be 0.4% lower than in 2015 (2.3%). However, the accumulative growth rate of China’s exports to the EU (-4.6%) for the period from January to

November in 2016 was in line with the same period in 2015 (-4.6%) while the GDP growth rate (1.6%) in the US will drop by 1% compared to 2015 (2.6%) , While the cumulative growth rate of China's exports to the US for the period from January to November in 2016 (-6.8%) reduced

significantly by10.8% compared to that for the same period in 2015 (4.0%). By comparing the United States and the EU, we find that China’s

exports to the United States decline and do not match the US GDP growth and we therefore believe that some products in the US market have been squeezed out China’s products. Moreover, we believe that this extrusion is not caused by the substitution effect of Southeast Asian countries.

Compared with the same period in 2015, the cumulative total of US imports from China from January to October 2016 decreased by US $ 21.114

billion, while imports from Indonesia, the Philippines, Thailand, Vietnam, Malaysia and other Southeast Asian countries increased only US $50.4 billion, which can only explain the decline of 25%. To sum up, the world trade pattern is likely to have been quietly changing, China’s exports to the

United States declines not because of the substitution effect of Southeast Asian countries, but the “Made in USA” has begun to squeeze “Made in

China” out of the US market. Table 2: Proportion of export to major economies and Contribution of trade classification

Percentage of total

exports

Accumulative growth from Jan

to Nov, %

Largest contributor to the decline Contribution,

％

USA 18.45% -6.80 Mechanical and electrical, audio-visual equipment and

parts, accessories

-3.62

EU 16.19% -4.60 Nuclear reactors, boilers, mechanical equipment and parts -1.33

Japan 6.25% -4.60 Mechanical and electrical, audio-visual equipment and

parts, accessories

-1.95

South Korea 4.43% -9.20 Mechanical and electrical, audio-visual equipment and

parts, accessories

-5.42

ASEAN 12.16% -8.30

Thailand 1.79% -3.10 Mechanical and electrical, audio-visual equipment and

parts, accessories

-1.16

Plant products Jewelry, noble metals and products; imitation

jewelry; coins Optical, medical and other equipment; watches;

musical instrument


Philippines 1.44% 12.20 Chemical industry and related industrial products -0.43

Malaysia 1.76% -17.30 Mechanical and electrical, audio-visual equipment and

parts, accessories

-4.44

Singapore 2.11% -14.60

Mineral products -1.82

Indonesia 1.52% -8.40

Plant products -0.71

India 2.81% 0.20

Chemical industry and related industrial products -4.03

Hong Kong 13.47% -10.60 Mechanical and electrical, audio-visual equipment and

parts, accessories -7.16

Taiwan 1.92% -11.30 Mechanical and electrical, audio-visual equipment and


Australia 1.79% -7.80 Mechanical and electrical, audio-visual equipment and


Russia 1.77% 7.00

Textile raw materials and textile products -2.29

South Africa 1.04% -19.90 Mechanical and electrical, audio-visual equipment and


Brazil 0.62% -22.20 Mechanical and electrical, audio-visual equipment and


Data source: WIND information, CCWE’s calculation.

It is foreseeable that in 2017 the new US President Trump will take office and apply more radical foreign trade policy than the Obama

administration. President Trump’s New Deal of the Hundred Days and his latest remarks suggest that he will take more steps to get jobs and

industrial production back to the US and hope that the next generation of production and innovation will take place in the United States. In addition, it is worth noting that President Trump’s transition team is considering a 5% tariff on Border Adjustment Tax (BAT) for goods imported from

overseas economies. If BAT is implemented after President Trump came to power, it will have a further impact on the pattern of world trade:

First of all, BAT if implemented, the extrusion of “Made in America” on “Made in China” will be more obvious. Because BAT is for products

imported from all countries, it will not directly affect the products of other countries to compete in the US market. Secondly, if the implementation of

BAT, the most likely result is that the interests of some Chinese enterprises and part of American consumers will be comprised, and some Chinese products will be driven out of the US market because of lack of competitive advantage. Finally, we should also take into account the mixed effects of

RMB devaluation and BAT. BAT levies a dollar-denominated tariff. If the RMB continues to depreciate in 2017, the price of Chinese exports in

RMB remains unchanged, and the export advantage duo to the RMB devaluation will offset the export disadvantages by BAT. The products denominated in US dollar continue to have a competitive advantage. In this case, some Chinese enterprises’ profit denominated in RMB is likely to

be unaffected. After the implementation of BAT, China’s exports will be more or less affected. However, the BAT proposed by President Trump is

implemented “distinguishing” domestic and foreign products, which may violate the WTO’s principle of fair competition. It can be expected, if the BAT is really implemented, including China, the European Union, the world’s major economies are likely to resort to WTO and complain of the

United States. However, taking into account the duration of the complaint process is often more than a year, China must prepare herself to respond to

BAT in 2017.

Based on the above analysis, CCWE speculates that annual accumulative growth rate of exports will be -6.9% for 2016 and -3.5% for 2017.

Finally, the trade surplus in 2016 is estimated to be around US $ 525 billion.

5. Price index: CPI maintains a moderate growth, PPI rising momentum unchanged

In November 2016, the national consumer price index rose 2.3%. For the first eleven months, the national consumer price index rose 2% over the same period last year. In November, the national consumer price index rose 0.1% month on month, of which food rose 0.2%. The biggest

increase in food is fresh vegetables category. Fresh vegetables grow in green house in winter and due to production costs, the nationwide cold

weather, prices of fresh vegetable rose 5.5% month on month, pulling CPI up by about 0.15 %. Other categories of food, such as fresh fruit, pork, aquatic products, eggs, and poultry prices continue to decline month on month, which together cause CPI to decrease by about 0.1 %. Another factor

driving up the CPI is that the prices of part of domestic energy products rise. The rising prices of gasoline, diesel, liquefied petroleum gas, and

residential coal cause CPI to rise 0.05% month on month.

Figure 27 CPI year-on-year and month-on-month growth rate Figure 28 PPI year-on-year and month-on-month growth rate

Data source: National Bureau of Statistics Data source: National Bureau of Statistics

In view of food prices in future, it will still be the main factor raising the CPI of the first quarter of 2017. Due to the phenomenon of La Nina,

Moth over month Month on month Moth over month Month on month


meteorologists have generally agreed with that this year will be “severely cold in the winter”, which will affect the planting and animal husbandry,

especially resulting in greater pressure on the supply of fresh vegetables. Coupled with that on the “Spring Festival” holiday residents have a great demand for food, so in the past two months, food prices will continue to grow. In addition, pork prices will also enter an upstream channel. 2017’s

CPI is expected to be a long U-shaped trend. The other driving up the CPI of the year came from PPI transduction, along with rising energy prices;

CPI of non-food consumer goods will enter the upward channel. According to the CPI year-on-year and month-on-month average trend and the situation of next year’s external demand, CCWE speculates that the annual CPI will rise 2.0% for 2016 and 2.2% for in 2017 year on year.

In November 2016, industrial producer prices rose 3.3%, an increase of 2.1% compared with the previous month, up by 1.5% month on month, an increase of 0.8% increase over the previous month. The upstream cost rapidly grew and led to PPI year-on-year growth beyond expected. The

total contribution of raw materials and mining industry to PPI reached 50%. In details, in the upstream industry, coal mining and washing industry,

ferrous metal smelting and rolling processing, non-ferrous metal smelting and rolling processing, oil processing industry, oil and gas industry, the five industries together affect the PPI rose about 60% year on year, is the main factor driving PPI up.

In view of the international commodity, the energy and metal prices will rise on a whole and continue to affect the PPI, which will be the main driving force of its rise. The prices of coal and iron ore rose particularly fast in 2016 will maintain the trend in 2017, but the momentum will be

weakened. But next year pressure of cutting production over capacity and inventory will not be weakened. the administrative measures for cutting

the overcapacity will continue to be an important factor for affecting coal prices and will form the stage support of coal prices. Coal prices are expected to be slightly volatile in the absolute value, but the average price than last year still has a significant recovery. At present, copper, lead, zinc

and other non-ferrous metals are at a lower level of inventory in the history and with relatively good price elasticity. In the first half of 2017 price is

relatively stable, but in the second half due to US demand is expected to rise, which will bring support for the prices of non-ferrous metals. Next year oil prices need to be concerned about. On November 30 last year, the Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna,

reached its first agreement on cutting the production for the past eight years, and decided to reduce oil output of 1.20 million barrels to 32.5 million

barrels. The agreement will come into force on the 1st day of this month and will last for 6 months. The organization’s largest oil producers Saudi Arabia will accept to reduce daily output 500,000 barrels, while the Iranian side does not accept reduction but keeps an appropriate increase of

100,000 barrels per day. Meanwhile, OPEC and non-OPEC oil producers in Vienna last year reached a 15-year joint production agreement,

non-OPEC oil-producing countries agreed to cut 55.8 million barrels of crude oil per day to cope with OPEC oil-producing countries. Russia is expected to cut 300,000 barrels per day in the first half of 2017, down about 2.7%. This to some extent will result in rise of oil prices in 2017.

However, another factor worth of attention is from the US that control rapid growth of oil price. In 2017, the US is expected to open the growth

model for oil production. For past several weeks, the US has been increasing the number of oil drilling platforms, and the investment in shale oil. US

are expected to increase shale oil wells by 60% at the end of the first quarter of 2017, with an increase of 300,000 to 400,000 barrels per day. Total global oil production in the first half of this year will be the actual output reduction of about 130-140 million barrels, down 1.5% compared to the

previous, indicating that the first six months of 2017 there is room for oil prices rising, but in the second half of the year agreement on less

production expires, oil price will be full of more uncertain factors.

In terms of global grain bulk, according to inventory and demand fundamentals, 2016 annual global ending stocks will reach a record high,

continue to put wheat prices under pressure of decline in 2017. As corn prices are still in the doldrums in recent years, the United States will reduce the sown area in 2017 and the scale of excess supply. While the decline in corn acreage not only in the United States, the decline in global supply

will help corn prices rebound slightly in the long term. With inventory reduction and rising transport costs, next year, price of soybean that own more

industrial properties are expected to go up with the shock of oil prices.

Industrial prices are expected to continue to rise steadily in the future. In view of the industry, PPI rising will gradually pass from the upstream

industry to the middle and lower industry, the number of rising industries will gradually increase, and prices of more and more industrial goods will also be on the rise. The contribution of processing industry to PPI rise will increase accordingly. At the same time due to the low base effect in 2016,

2017’s PPI will be higher year on year. According to the PPI year-on-year and month-on-month average trend over past years as well as the external

demand situation next year, CCWE speculates that 2016’s PPI will grow year on year by -1.4% and the value will be 3.0% for 2017.

6. Consumption: Automobile production and sales slowed down the growth, retail sales growth slightly lowered

In November 2016, total retail sales of social consumer goods reached 3,095.9 billion Yuan, an increase of 10.8% nominal growth (the actual growth of 9.2% after deducting price factor). Retail sales of consumer goods above designated size amounted to 1,479.2 billion Yuan, an increase of

9.5%. From January to November, total retail sales of social consumer goods reached 30,056 billion Yuan, an increase of 10.4%. Retail sales of

consumer goods above designated size reached 13.7203 trillion Yuan, an increase of 7.9%. The consumer confidence index continued to rise and reached 108.6 in November, which was 1.4% higher than the previous month. The data indicates that the current consumption is still in the optimistic

range. Automobile consumption remained strong: in November, auto retail sales grew 13.1% year on year, while auto retail sales grew 9.5% year on

year from January to November. After calculation, the annual sales will be more than 26 million cars in 2016.

However, one reason why consumption did not reach higher growth rates in 2016 in that the dividend of “second child” policy is not so much as

expected. According to CCWE’s earlier quarterly report, 2016’s policy of “second child” may become a major driving force for consumption. According to family planning, hospital delivery statistics and the birth of population and pregnancy, in 2016 the birth population will be 17.5 million,

an increase of 1 million than 2015, far lower than previously estimated 2.5 million.

Figure 29 Year-on-year growth of total retail sales of social consumer goods by major categories


Data source: National Bureau of Statistics Figure 30 Year-on-year growth of total retail sale of social consumer goods Figure 31 Year-on-year growth of retail sale of

automobile

Data source: Data source: National Bureau of Statistics, WIND database Data source: Data source: National Bureau of Statistics,

WIND database

Although consumption growth remains robust in the second half of the year, good growth trends are more difficult to sustain after 2017.

One is because 2016 consumer spending stabilized largely dependent on hot car sales. In 2016, the November’s retail sales growth of social

consumer goods just surpluses 0.8% over October, of which auto sales growth, 4% more than October, and the auto sales in November accounting for more than 12% of total retail sales of social consumer goods. The calculation can help find that the vast majority of consumption growth

momentum came from car sales. After entering into 2017, although the purchase tax incentives continue until the end of 2017, the introduction of

new policies is delayed, and preferential treatment in 2017 is only half of 2016’s, there is great possibility to lead to overdraft of car consumption in 2016, hot sales trend in 2017 can’t be sustainable.

Second, the dual pressures of income and mortgage limit the purchasing power of residents to some extent. The first three quarters of 2016, the

actual growth of the national per capita disposable income was 6.3%, lower than the GDP growth rate. By the third quarter of 2016, residential mortgage stock has soared to as high as 17.9 trillion, accounting for more than 30% of household savings. In 2016 new mortgage grows up to 3.8

trillion. Considering the mortgage mainly borne by young people, young people is the main force of social consumption, high mortgage will have a

greater crowding -out effect on household consumption. With the rising mortgage interest rates, mortgage pressure further increases, and will have a negative impact on the growth of social consumption in 2017.

Based on the above analysis, CCWE predicts that the year-on-year growth rate of total retail sales of social consumer goods will be 10.4% for

2016 and 10.0% for 2017.

Month-on-month comparison of total retail sale of

social consumer goods

Accumulative year-on-year comparison of total

retail sale of social consumer goods

Month-on-month comparison of

retail sale of automobiles

Accumulative year-on-year

comparison of retail sale of social

automobiles


100% 80% 60% 40% 20% 0%

2010-02

2010-07

2010-12

2011-05

2011-10

2012-03

2012-08

2013-01

2013-06

2013-11

2014-04

2014-09

2015-02

2015-07

2015-12

2016-05

2016-10

7. De-capacity: de-capacity efforts have been intensified, but there have emerged some hard nuts

to crack

China’s de-capacity targets for 2016 was 45 million tons of steel and 250 million tons of coal and so far

both targets have been exceeded. However, the process has not been very smooth this year. According to an

inter-ministerial meeting held in August on tackling overcapacities and on overcoming difficulties to achieve further

development in the steel and coal industries, by the end of July, only 47% and 38% of this year’s de-capacity targets

for the steel and coal industries had been achieved respectively and the overall progress had not been satisfactory,

and there was imbalance in the progress of different regions. However in October, there was report that the

de-capacity targets for both steel and coal industries had been completed by over 80% and by the end of October

both industries had fulfilled their de-capacity targets ahead of schedule. According to reports on de-capacity of

the steel industry from 26 provinces, altogether, the industry reduced its production capacity by 72 million tons in the

whole year. There has even been prediction that the actual de-capacity to be achieved this year in the steel industry

can be twice as much as the original target.

Based on the above figures, in August and September, on average, 7.425 million tons of production capacity

was reduced each month in the steel industry (which was more than 16.5% of the original target for the whole year).

In October, a capacity of 9 million tons (or 20% of the original target of the year) was reduced in the steel industry

and in November and December, an average 13.5 million tons of capacity was reduced each month (or 30%

respectively of the original target of the year). There has even been prediction that the actually reduced capacity in

the steel industry can be twice as much as the original target set for the year. De-capacity in the coal industry has

also been “accelerating” vigorously. On average, 21% of the year’s de-capacity target was achieved respectively in

August and September, and in October, 20% was achieved. Chart 32 De-capacity progress in steel & coal industries in

2016

Chart 33 Fixed-assets investment made in ferrous metal

industry (accumulated year-on-year)

160%

140%

120%

Steel Coal

1 2 3 4 5 6 7 8 9 10 11

12

50

40

30

20

10

0

-10

-20

-30

-40

smelting & rolling mining &

dressing

Data Source: based on data collected from Internet Data Source: Wind database

We can see that de-capacity efforts have been intensified this year. Along with reduction of production capacity,

investments in fixed-assets in overcapacity industries have also declined. Take the ferrous metal industry (mainly

steelmaking) as an example (see Chart 33), ore-mining and dressing sectors have maintained a declining rate of

around 30% and smelting and rolling processing have also been going down. De-leverage coordinated with

de-capacity, significant results have been achieved. Chart 34 shows that the upward trend of leverage rates of the

ferrous and non-ferrous metal industries has been curbed, and the rates have begun going down before the end of the


year.

In terms of specific methods of de-capacity, the two industries have applied different “strategies”.

In 2016, de-capacity in the steel industry has mainly been “writing off” dead capacities, or capacities that

were no longer in production. Take iron-making as an example, total “dead capacity in this sector has been

estimated at 40 million tons, of which 27 million tons have been taken out of the market and the rest 13 million

will be forced out in 2017. The whole year’s de-capacity target for the iron-making sector will be over 33

million tons in 2017, in which “dead capacity” will account only for less than 40%6, meaning that real things will

have to be done to tackle capacities that are still in production.

As for the coal industry, apart from shutting down small mines (those producing less than 300,000 tons a year),

and promoting acquisition and reorganization, regulatory policies over utilization of production capacities have also

been taken. For example, a 276-working day/year policy has been imposed. Strictly speaking, restriction on

utilization of production capacity is not de-capacity. It is only reduction of output. It is expected that in 2017, the coal

industry will take a step further to “reduce production capacity” in stead of “reducing output”. _________________________________

6 http://stock.jrj.com.cn/2016/12/27053621890399.shtml

http://stock.jrj.com.cn/2016/12/27053621890399.shtml

Center for China in the World Economy

2010-02

2010-05

2010-08

2010-11

2011-02

2011-05

2011-08

2011-11

2012-02

2012-05

2012-08

2012-11

2013-02

2013-05

2013-08

2013-11

2014-02

2014-05

2014-08

2014-11

2015-02

2015-05

2015-08

2015-11

2016-02

2016-05

2016-08

Chart 34 Change of leverage ratios in overcapacity industries

75

70

65

60

55

50

45

Coal mining, washing & dressing: debt-to-asset ratio Ferrous metal mining, dressing: debt-to-asset ratio

Nonferrous metal mining, dressing: debt-to-asset ratio Ferrous metal smelting, rolling: debt-to-asset ratio

Nonferrous metal smelting, rolling: debt-to-asset ratio

Data Source: Wind database

Chart 35 Deformed steel bar (Φ12-25) price including tax (yuan/ton) 5,500

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

2010-01-08 2011-01-08 2012-01-08 2013-01-08 2014-01-08 2015-01-08 2016-01-08


All the above means that excess capacity, like “redundant fat” on a human body, has been effectively reduced

and next step, we have to tackle those hard nuts to crack. We need to have the courage to “scrape the poison off the

bone” (a kind of traditional Chinese practice to treat certain disease). However, de-capacity is not the ultimate aim

itself. Our aim is to enable the industries’ transformation and upgrading and the sustainable development of the

economy, society and environment.

Currently, the pollution problem represented by smog is wrenching the nerves of people in China and is

challenging the psychological limit of the public. According to Chen Jining, Minister of Environmental Protection,

the six provinces and municipalities in and around the Beijing-Tianjin-Hebei region account for 7.2% of the total

area of China, but consume 33% of the coal used in China and unit area pollution emission in this region is about

four times as much as the country’s average level. The steel output in this area is 340 million tons, or 43% of the

country’s total, the coke output in this area is 47% of the country’s total, electrolytic aluminum output is 38% of the

country’s total, plate glass output is 33% of the country’s total and cement output is 19% of the country’s total. The

serious smog problem in northern part of China probably has close connection with the concentration of these

high-energy consumption and high-pollution overcapacity industries in this area. In this sense, de-capacity is not only

related to a number of overcapacity industries, it also has a lot to do with the sustainable development of China’s

economy and improvement of people’s living standard in China, therefore, it has to be pushed forward vigorously.


Although this year’s de-capacity targets have been achieved ahead of schedule, along with the progress of

de-capacity, oversupply in the market has been eased and steel and coal prices have begun to rebound. This has

aroused the excitement of some enterprises and their determination on de-capacity has begun to crack. A small number of

enterprises have even begun to act against government’s call to cut production capacity and have put outdated capacities back

into production. This has led to the problem of outdated capacities’ squeezing against advanced capacities. For example, some

small steel mills have resumed production and sale of inferior quality steel bars and this has disrupted the normal order in the

market. To these outdated capacities, it is necessary to “eradicate them at the root” to prevent them from “rising again from the

ash”. We suggest raising environmental protection requirements for steel mills, strengthening enforcement of

environmental laws and clamping down all steel mills that do not meet required standards.

We also need to realize that as our macro-economic prediction report on the 2nd quarter of 2016 emphasized

that different approaches have to be taken to reduce production capacity. While cutting away unwanted flesh, we also

need to increase our muscles – i.e. build advanced production capacity and promote transformation and upgrading of

the industry. This will become a new, sustainable growth engine for China’s economy. Take the steel industry as an

example. If outdated production capacities represented by “small, scattered and pollution-causing” steel mills can be

effectively tackled, steel prices can be substantially bolstered and profitability of steel plants can be improved and the

extra income made can be used to invest in building new type of environmentally-friendly high-tech steel capacities

and realize upgrading of outdated capacities to higher grade capacities.

We suggest that the government build high-tech and low-pollution steel plants in coastal areas, import from

foreign countries high-quality iron ores and coke to smelt and process products with clean production technologies

for domestic and foreign markets. To locate steel and other heavy and chemical industries in coastal areas can

ensure better implementation of China’s Belt and Road and other development strategies, because once the

economies of India and other countries begin to take off, our modern steel plants will be able to sell their products

to those regions in huge quantities because their infrastructure construction and industrialization capacities are far

from being able to meet their own needs. In this respect, the case of Shougang Group deserves our study. After

being relocated from Beijing to Caofeidian, it has not only integrated itself with today’s most advanced

steel-making technologies in the world, but also has built a modern heavy industrial park that is extremely

eco-friendly. Iron ores are transported directly from specialized wharfs to processing plants and highly efficient

production lines with streamlined flows and intelligent equipment are running orderly. Its products can be shipped

to all over the world through its wharfs for finished products. All segments are well-connected, which saves

energy and lowers pollution. “Green production” is one of the most significant features in this plant area. Jingtang

Company has invested 7.596 million yuan in environmental protection, which account for 11.21% of the

company’s total investment in construction. Among its environmental protection equipment are 128 waste gas

treatment facilities and eight waste water treatment facilities, which can save about 24 million tons of surface

water resources each year and it has basically realized zero emission or discharge of waste gas or waste water. In

2013, the smoke and dust emission of Shougang Jingtang Company was 0.418kg from production of each ton of

steel, its per-ton-steel emission of SO2 was 0.398kg and its average ambient air quality SO2 index was 24μg/m³,

better than grade two of the national standard which is 60μg/m³ a year on average. Dust fall was 15.8tons/sq.km

per month according to manual monitoring. In terms of the emission of SO2, Shougang Group of Caofeidian’s

emission is only 9% of the level of small steel mills and 26.2% of the average of major steel plants. Its technical

upgrading has not reduced its production capacity. On the contrary, it has boosted production and its production

capacity has risen from 8 million tons to 10 million tons. Its investment in the first phase was 67.7 billion yuan.

The designed production capacities of its first phase were 8.98 million tons of iron, 9.7 million tons of steel and


9.13 million tons of rolled steel. Its costs have also been significantly reduced as it can save 100 to 150 yuan for

each ton of products it produces, meaning that it can save more than 900 million yuan if it produces 9 million tons

each year. It is our belief that investment in advanced capacities can become a green new engine that can fuel the

growth of economy.

8. Finance: banks need to speed up disposal of bad debts and scale of default in bond market

still under control

● Banks need to accelerate disposal of bad debts

According to data from China Banking Regulatory Commission, in the 3rd quarter of 2016, bad debt rate

reached 1.76% in China’s commercial banks. Since the first quarter of 2012, the rate of non-performing loans has

risen from 0.94% to 1.76%. Although it is far lower than the level between 2003 and 2008, the upward trend has

caused concern in the market. In comparison, commercial banks’ coverage of provision for bad debts has kept

declining since the end of 2012, from nearly 300% in the 4th quarter of 2012 to 175.5% in the 3rd quarter of 2016.

As of the 3rd quarter of 2016, outstanding bad loans totaled 1.4939 trillion yuan, and balance of loan loss provisions

was 2.6221 trillion.

Industry-wise, ratio of nonperforming loans at the end of 2015 was the highest for the wholesale and retail

industry (which reached 4.3%), followed by agricultural, forestry, animal husbandry and fishing industry,

manufacturing industry and mining industry. The nonperforming ratios for construction (1.5%) and for real estate

(0.8%) industries were not very high. In recent years, nonperforming ratios have been on the rise for most industries

with mining and wholesale and retail industries saw the most noticeable rises, both of which exceeded 1% from 2014

to 2015.


NPL ratio: mining NPL ratio: manufacturing NPL ratio: construction

NPL ratio: real estate NPL ratio: personal loan

2003-12

2004-10

2005-08

2006-06

2007-04

2008-02

2008-12

2009-10

2010-08

2011-06

2012-04

2013-02

2013-12

2014-10

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2006-08

2007-07

2008-06

2009-05

2010-04

2011-03

2012-02

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2016-09

Chart 36 Ratio of non-performing loans Chart 37 Coverage of bad loan provision

20 400

15 300

10 200

5 100

0 0

Data Source: Wind database Data Source: Wind database

Chart 38 Changes in ratios of non-performing loans

14

12

10

8

6

4

2

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Many market institutions have doubt about the statistical caliber and statistics of nonperforming debts in China.

Credit Lyonnais Securities, for example, believes that if the interest coverage of a borrowing enterprise has been

lower than 1 for two consecutive years or if the enterprise has been losing money for two years in a row, its loans can

be considered “bad debts”. Calculated in this way, China’s rate of nonperforming debt would have exceeded 4%, far

higher than the 1.25% officially reported. The ratio is expected to be higher in 2015. According to IMF’s Global

Financial Stability Report (2016), around 15% of the debts of China’s enterprises’ are debts-at-risk, of which 9%

have been debts-at-risk for two consecutive years. Calculation made on larger caliber by Larry Hu, Chief Economist

at Macquarie Group shows that debts-at-risk in China stand at around 7.2 trillion yuan. Based on the loss rate of

nonperforming loans applied by the Basel Committee, which is 45%, China’s actual loss from nonperforming loans

can be around 3.2 trillion yuan. Even if such loss really happens, in Larry Hu’s opinion, the banking system will be

able to absorb it.

No matter what caliber is used, there is consensus that nonperformance ratio is on the rise. We believe that the

current rise of nonperformance ratio is the bad debt accumulation period before the nonperforming loans are digested.

While recognizing the rise of nonperformance ratios, we should also see that the Chinese government and the

banking system are also making efforts to tackle nonperforming loans. In the first two quarters of 2016, 16 listed

banks wrote off and sold in packages more than 24 million yuan nonperforming loans in total, which was nearly 20%

of all the outstanding nonperforming loans by the end of the 2nd quarter, and the amount disposed was 50% up


compared with the amount dealt with in the same period of the previous year. We can see that China’s commercial

banks have been actively tackling nonperforming loans. And, taking into account that China’s banking system has

adequate provisions (the coverage of which is significantly higher than that of their foreign counterparts’), with the

progress of de-capacity and de-leveraging, zombie enterprises will exit the market, new loans will flow to

better-quality enterprises and increase of nonperforming loans can be curbed. Thus the systematic risk brought along

by bad debts can be generally put under control. Nevertheless, the rise of nonperformance ratio indeed deserves our

vigilance. Even if banks can “get rid of” nonperforming assets by writing them off or by transferring them, the assets

have after all “gone bad”, and it has to be the shareholders, depositors and tax-payers to bear the losses. Ensuring

effective rationing of credit from the beginning and serve the transitioning of the economy and industrial upgrading is

the only way to solve the nonperformance problem. We suggest that commercial banks take further steps to

strengthen tackling of nonperforming loans, particularly those of overcapacity industries, take bold and resolute

measures to force bankruptcy outdated capacities, write off or reorganize related debts and get rid of the burdens as

fast as possible in order to optimize asset structure of banks and guide credit fund to support advanced capacities.


Chart 39 Ratios of nonperforming loans of different industries (2015)

4.5

4.0 3.5 3.0 2.5 2.0

4.3

3.5 3.4 Average 1.67%

2.3 2.3 2.2 2.1 1.8

1.6

1.5 1.0 0.5 0.0

1.4 1.1 0.8 0.8

0.8

0.6 0.5 0.5 0.4

0.2 0.2

0.1 0.1


Scale of default in bond market still under control

Debt default in the whole year of 2015 was 12.6 billion yuan, but in the first quarter of 2016 alone, the amount reached 12.7 billion yuan. The total amount of the whole year of 2016 exceeded 40 billion yuan which was nearly three times as much as the total of the amounts of 2014 and 2015. Bond market risks began to emerge in 2016. In December that has just passed, the “fake seal” incident of Sealand Securities shrouded yet another layer of shadow over the bond market. Apart from the panic in the market caused by the Sealand Securities incident, other factors have also inflicted heavy blows on the bond market.

Chart 40 SHIBOR one month interest rates Chart 41 Bond market leverage ratios

3.40

3.30

3.20

3.10

3.00

2.90

2.80

2.70

2.60

2016-09-01 2016-10-01 2016-11-01 2016-12-01

1.12

1.11

1.1

1.09

1.08

Data Source: Wi n d da t abase Data Source: Wi n d database

First of all, monetary policy has maintained prudent as a meeting by the Political Bureau of the

CPC Central Committee has called for prudency in monetary policy and attention to guard against risks. Although

fund shortages may occur at the end of the year, due to pressure of depreciation of Renminbi and other factors, the

Central Bank has not injected much liquidity into the market. On the contrary, it has made net withdrawal of funds in

small scales in November and December. Due to relative shortage of funds in the market, one-month SHIBOR rate

has kept climbing, reflecting a tightening fund supply at the moment.


40,000 16 35,000 14 30,000 12 25,000 10 20,000 8 15,000 6 10,000 4 5,000 2 0 0

2013-12

2014-03

2014-06

2014-09

2014-12

2015-03

2015-06

2015-09

2015-12

2016-03

2016-06

2016-09

2014-06

2014-08

2014-10

2014-12

2015-02

2015-04

2015-06

2015-08

2015-10

2015-12

2016-02

2016-04

2016-06

Secondly, signs have emerged that deceleration of growth is about to end. The Purchasing Managers Index

(PMI) of China’s manufacturing sector has remained above the critical point for five consecutive months. Although

the index dropped slightly in December, it was still the second highest in 2016, reaching 51.4%. The PMI of

non-manufacturing sectors even reached 54.4%. In addition, the Producer Price Index (PPI) saw enlarged

expansions in November both month-on-month and year-on-year and profits of industrial enterprises above

designated size have maintained positive momentum, registering an accumulated growth of 9.4% from January to

November. Thus, all indicators show that preliminary signs of the end of deceleration of the growth of China’s

economy have appeared. The positive economic trend has also attracted flow of funds to the real economy, which

will also inflict negative impact on the bond market. Therefore, a prudent monetary policy and preliminary signs of a

recovering economy both bring pressure to the bond market.

Then, will there be risks in the bond market in the future? Many people think that increase of leverage in the

bond market has lead to accumulation of risks in the bond market. However we believe that leverages are not so high

in the bond market. We calculate leverage ratio using the following formula: bonds in custody/ (bonds in

custody-bonds to be redeemed). See Chart 41. We have discovered that leverage ratio has shown signs of decline.

Therefore, we believe that leverage ratio in the bond market is not the source of risks.

Although in our opinion leverage ratio is not the source of risk in the bond market, the leverage ratio

mentioned in the above analysis mainly refers to on-sheet leverage ratio. In fact, the increase of off-sheet leverages,

or leverage activities such as informal entrusted holding and formal interbank negotiable certificates of deposit

(NCDs) are the key source of risks in the bond market. According to statistics from China Central Depository

Center, on the entire chain of entrusted holding, the there are at least 200 billion yuan of bonds held off-sheet

according to most conservative estimation. This plus the bonds traded in bond exchanges, total bonds in the market

can be as high as 500 billion yuan. As entrusted holding is a kind of informal behavior conducted mostly through

verbal agreement between the two parties of transactions and is not under formal supervision of any authorities or

bound by any laws, defaults are more likely to happen in these transactions due to absence of protection by the

system. In the meantime, as interbank NCDs and funds obtained from entrusted holdings can be used in other

financial activities, once there is default, a series of unwanted chain reactions will be triggered. In recent years,

interbank NCD has been growing at skyrocketing speed. In August 2013, the Central Bank already began considering

to try issuing NCDs in the interbank market, optimize short-, medium and long-term interest rates quoted by Shibor

in interbank lending market so as to kick off the reform of liberalization of deposit interest rates. Similarly, income

from NCDs will used in different ways to generate more earnings. Once default happens, it will lead to the breakup

of the entire chain. However, despite of this, entrusted holdings and NCDs are small in scales compared with those of

nonperforming and bad bank loans. Default incidents may cause short-term panic in the bond market, but they will

not trigger systematic risks.

Chart 42 Interbank NCDs Chart 43 Interbank exclusive financial products

60,000

50,000

40,000

30,000

20,000

10,000

0

Ratio of balance of WMPs: interbank exclusive products




Apart from the above, another risk that needs to heed in the bond market is the volume of bonds that are going

to mature in 2017. In 2016, the total volume that had to be repaid in the whole year was 20.3 trillion yuan, but so far,

just a few days into 2017, the total volume that has to be repaid has already reached 15.9 trillion yuan. Considering

however, that totally 18-trillion-yuan of bonds with terms of less than a year were issued in 2016, the value of which

accounts for 49.76% of the total, we can reckon that the total amount of the bonds to be repaid in 2017 will definitely

surpass that of 2016. In terms of industrial distribution of bonds default in 2016, most of the defaults happened in

steel, coal, non-ferrous and other industries that need to cut their production capacities and in building materials,

cement and other industries that related to real estate. As 2017 will be a year of deepening supply-side structural

reform and a year of stricter regulation on the real estate sector, we believe debt default will further increase in 2017.

In addition, some enterprises in agricultural, food and logistics industries have also had their debts defaulted due to

poor profitability. In the year ahead, the profitability of relevant industries is not expected to see significant

improvement. Therefore it deserves to pay attention to debt defaults in related industries.


In the year ahead, default risk in the bond market still needs attention. However, compared with

nonperforming and bad bank debts, the scale of default that likely happen in the bond market is expected to be

relatively small and may not trigger systematic financial risks.


II. Tangled Mess in International Situation as World Prepares for

Looming “Trump Shock”

Uncertainty in the external environment is the major challenge for China to “seek improvement while

maintaining stability” for its economy in 2017. Looking ahead into 2017, “polarization of economic performance”

and the “Trump shock” will become the two key phrases for the global economy.

1. Polarization to happen first within developed countries

On the whole, the U.S. economy will improve in the short term, while European and Japanese economies will

remain sluggish.

The U.S.: the economy is going to improve in the short term and the “Trump shock” is looming

Indicators like accelerating GDP, employment rate, CPI etc. show that there are already signs of stabilizing

recovery of the American economy in the short term. While growth is gaining momentum, Federal Reserve’s steps to

raise interest rates is also speeding up. The second interest hike was made after the Federal Reserve’s meeting in

December 2016 and it is predicted that a third one will happen within 2017.

The “Trump shock” will prove its impact on the U.S. and the global economies in 2017. President-elect Trump

will be sworn in on January 20, 2017. The winning of Donald Trump as the president of the United States was a huge

“black swan event“ in 2016 and Trump himself is also widely considered one of the presidents in the U.S. history

with the “most unique personality”. The governing principle of Mr. Trump can be summarized concisely as

“America First”. Among his objectives, his most concerned and the most specific economic target is –“to make

America realize a nominal GDP growth of 5%”.

For this purpose, Trump has put forward policies and propositions that are inconsistent in many aspects with the

current ones. After he takes office, it is very likely that there will be major turnarounds in many aspects of America’s

domestic and foreign policies, which are expected to be represented mainly in the following three points:

First of all, the United States will turn from being a flag bearer that advocates free trade to a practitioner of trade

protectionism. Trump has explicitly expressed that the U.S. will withdraw from the TPP after he takes office. I n

addition, he has also proposed the policy of “levying consistent tariffs of 5%-10% on all imported goods (Border

Adjustment Tax, BAT)”; particularly penalty tariffs will be imposed on Mexico and China.

Secondly, American enterprises will turn from going global to bringing manufacturing back to the U.S. For

this, Trump has brought forward the following tax-cut incentives: on accumulated profits brought back to the U.S.

by overseas subsidiaries of American companies, a lump-sum 10% tax will be charged, which can be paid up in

10 years. Meanwhile, taxes on future profits of overseas subsidiaries of American companies will be levied on a

yearly basis.

Thirdly, turn from monetary easing to fiscal stimulus. Main measures include: 1) drastically tax cutting

corporate taxes from the current 35% to 15%; 2) financially supporting infrastructural construction.

Fourthly, strengthen infrastructural construction. Trump has proposed a 550-billion-dollar infrastructural

construction program. If deflated to his four years in office, then the yearly apportioned amount will be 137.5 billion


dollars.

If these policies and propositions can be implemented, they will indeed be able to boost the U.S. economy in the

short term. The U.S.’ actual GDP growth in 2017 is expected to be 2.2%, about 0.5 percentage point higher than the

rate of 2016.

However, it still remains to be seen if Trump’s new policies can boost the potential growth rate of the U.S.

economy in the long-term. Income gap has kept widening and labor participation has kept declining, the long-term

growth center for the U.S. economy has significantly deteriorated. Trump’s tax reduction and expansionary financial

policies may further worsen the income distribution structure, making rich people richer and poor people poorer. This will hurt total

demand and erode the intrinsic dynamics of growth of the U.S. economy. In addition, we should be aware that there are many

conflictions in Trump’s policies and propositions. For example, both tax reductions and infrastructural

construction mean the increase of financial deficits and government debts, but interest rate hikes demand smaller

room for deficit. Furthermore, interest rate hikes will lead to a stronger US dollar, and a stronger US dollars does not

contribute to the return of manufacturing to the U.S.


In a word, it deserves a high degree of attention to the likely impact of Trump’s new policies on the U.S. and the

global economies, but there is no need to excessively exaggerate the impact. It is very likely that the current financial

market has over-estimated the strength and impact of Trump’s new policies. It is more a reflection of the “will of

Trump” than the “ability of Trump”. This situation may very likely remain till the early period of the Trump

administration in 2017. With his actual ruling performance seen by the public after he takes office, market

expectations will retrace based on his “capabilities”.

Europe: fragile recovery and rising political risks

The Eurozone economy is still fragile and economic growth in 2016 was weaker than in 2015. The financial environment

was still highly volatile, particularly in Italy and a few other countries where ratios of nonperforming bank loans have

been stubbornly high. Room for monetary policies has been limited: QE is facing increasing embarrassment that there

is no bond to buy; negative interest rate is not only being questioned about its effects, it has also worsened

deterioration of the business environment of the banking industry. Restricted by high debt ratios, financial policies and

structural reforms are hard to be implemented. It is expected that in 2017, economic growth in Eurozone will be

around 1.5%, 0.1-0.2 percentage point lower than in 2016.

2017 is a year of general elections in Europe and Germany, France, Italy and the Netherlands will hold political elections for their new governments.

In a time of tangled economic, labor, anti-terrorism and ethnic issues, conservatism and nationalism have reemerged in a number of countries.

Germany is the most important “core country” in the Eurozone and the result of its general election in September 2017

will have direct impact on the direction of European integration in the future. Fueled by populism, the terrorist attacks that have

happened in succession in Europe have led to more and more questions and opposition to the refugee policy of the Merkel government. Right

now, right wing populist forces represented by Alternative for Germany （AFD） is gaining more and more support

according to opinion polls in Germany. Although AFD was just founded in 2013, it has rapidly become the largest

opposition party in Germany; while support for Christian Democratic Union of Germany (CDU), a party led by

Merkel and for the left-wing Social Democratic Party of Germany have dropped. In addition, the U.K. will begin its

complicated Brexit process that is full of uncertainty. All these elements will exacerbate the risks in the European

economy.

Japan: lethargic economy with no sign of improvement in sight

The Japanese economy is still deep in the quagmire of “deflation” and “liquidity trap”. An aging population

has led to inactive consumption and year-on-year growth of commercial sales has turned negative. Its monetary

policies have not only been ineffective in stimulating the economy, the negative interest rate has inflicted negative

impact on the banking sector. Its room for financial policies has been restricted by heavy debts—the central

government has to use about one fourth of its spending to pay back principals and interests of the existing debts.

Generally speaking, the Japanese economy used to be at the forefront of the growth of the world economy and its

per capita capital stock is still one of the highest in the world. Therefore, unless technological breakthrough of

industrial revolution level happens, its population structure will be the ultimate core element that determines the trend

of the Japanese economy. It is our opinion that it is hard for the Japanese economy to see significant improvement in

2017 and the year’s economic growth will remain at 0.5%, which is approximately the same as that in 2016. Although

hikes of international bulk commodity prices may bolster commodity prices in Japan, its core inflation is expected to

remain in the negative territory or around zero.


2. Greater polarization to happen between the U.S. and emerging

markets

On one hand, the recovery of the U.S. economy and the tightening of policies of the Federal Reserve mean that

global liquidity is seeing a turning point in the short term, emerging market economies however, have become even

more vulnerable in face of the turning point of the liquidity of US dollars. The economic fundamentals of most

emerging economies prefer easy monetary policy environments. The hike of interest rates in the U.S. however has

forced these countries to adjust their policies to curb the possible outflow of funds. In fact, there was already a

rehearsal of the impact of the turning point of liquidity of US dollars in the later half of 2014. The worst affected were

prices of staple commodities and resource-exporting emerging economies. Considering that prices of staple

commodities are expected to be better next year than in the past two years, manufactured goods exporters such as

Mexico and Vietnam may suffer heavier impacts than resource exporters such as Russia and Brazil.

On the other hand, in an over-all environment of rebound of trade protectionism, emerging market countries that

rely heavily on exporting are facing even worse external environment and their gaming either with their trading

counterparts or with trade competitors are expected to become even fiercer. Mr. Trump, the newly elected U.S.

president, has an evidently strong tendency for trade protectionism. If the largest economy and the No.1 power in the

world reverse its economic policies, turning from free trade to trade protectionism, it will undoubtedly have profound

impact on the global economy—the impact will not only happen on international economic and trade practices, but

also on economic thoughts and trend of academic research on economics. These elements will inflict further blow on

emerging market economies that rely heavily on export of manufactured goods.


India’s currency reform by “scrapping” some of its banknotes is a move that will cause domino effects. It will

weaken its economic operation efficiency in the short run and exacerbate outflow of capital and depreciation of its

currency. In order to crack down on corruption and fake notes, and in the meantime, hoping to force the country’s

huge underground economy into tax-payers, the Modi government of India announced on November 8, 2016 to ban

the old 500 and 1000 rupee domination notes before the end of the year. The banned notes account for 80% of the total

amount of currency circulating in India. To support the implementation of the currency ban, the Indian government

announced further on December 8 measures to limit the amounts of gold held by residents: married and unmarried

women are allowed to keep at most 500 grams and 250 grams of gold respectively per person, while men can only

keep 100 grams of gold at most per person. Gold held above those limits will be considered being held illegally.

As most transactions are paid in cash in the India, currency reform by “note scrapping” has had huge impact on

the society. First of all, “note scrapping” has triggered certain degree of chaos in the society: short supply of new notes,

long queues in front of banks and ATMs and panic buying of gold and other luxury goods. Many transactions had to

be made through the primeval method of barter trade. Meanwhile, the “currency ban” has weakened the overall

efficiency of economic operation of India in the short run and financial, retail, manufacturing and real estate

7industries have all suffered certain degree of impact. Manufacturing industry PMI and service industry PMI both

declined in November. Due to impact of “currency ban”, rupee has depreciated dramatically. Rupee vs US dollar

exchange rate has dropped nearly 3% from 66.7 before the currency reform to 68.7 on November 28. Although the

rate rebounded a little later, it is still fluctuating around 68, far lower than the level before the currency reform.

Against the backdrop of Federal Reserve’s raise of interest rates and a stronger US dollar, “currency ban” has

further increased risks of capital outflow and depreciation of rupees for the India economy. Therefore, it is necessary to

remain highly vigilant. India’s GDP growths in the first three quarters of 2016 were 8.0%, 7.1% and 7.3% respectively. It

is expected that the rate will be significantly lower in the 4 th quarter. In 2017, India’s GDP growth is expected to

reverse the upward trend in the past five years and drop to below 7%.

7 Purchasing real estate is one of the most common ways of money laundering in India. There is report that “currency ban” has already inflicted negative impact on real estate transaction volumes in Mumbai and other large cities.


Experts’ Column

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David Daokui Li: Take multiple approaches to tackle fund outflow and exchange rate

depreciation issues

The biggest challenge for the Chinese economy in 2017 comes from the outside, mainly from the U.S. After

taking office, Trump will most probably do the following three things in the economic sphere: first of all,

drastically cutting taxes, particularly personal income taxes to stimulate consumption of domestic citizens;

secondly, imposing tariffs on all commodities imported to the U.S., or implementing Border Adjustment

Taxes(BAT). The import substitution effect that will follow will stimulate America’s domestic economy; thirdly,

launching massive infrastructural construction programs and the scales is expected to be between 50 billion and

80 billion US dollars a year. The above three things will stimulate the American economy within a short period

of time, leading to increased demand for the U.S. currency and rise of all kinds of interest rates in Ameri ca. In

the meantime, the Federal Reserve will accelerate steps to increase interest rates in face of the above situation.

The combination of the two things makes it very similar to the situation of the U.S. economy in 1980. At that

time, President Reagan implemented a fiscal stimulus program after he took office. Meanwhile, Paul Volcker,

the then Chairman of Federal Reserve raised interest rates. Such policy combination will have far -reaching

international impact, causing accelerated flow of funds from all over the world into the U.S. and exchange rate of

US dollars will keep rising.

Under such circumstances, there is still pressure of depreciation for Renminbi in the short run and China has

to take practical measures to manage the exchange rates and tackle the difficult problem of outflow of funds. First

of all, effectively control business activities based on irrational expectations. Many enterprises believe that asset

prices in the U.S. are cheap and Renminbi may see drastic depreciations. Based this projection, many of them

changed their Renminbi into US dollars to make investments in foreign countries. However, many

manufacturing enterprises lack experience in international financial markets, and related investments may suffer

heavy losses. Enterprise managements must develop related measures to strengthen verification of the authenticity

of transactions and prevent outflow of funds for speculation purposes under the disguise of trading projects.

According to our research, this is the main outlet for outflow of funds at present. Meanwhile, we do not

recommend introducing stricter measures restricting residents’ need to change for foreign currencies because

strict measures may have opposite effect, causing panic and not contributing to stabilizing residents ’

expectations. Furthermore, we should strengthen our guidance in domestic and foreign markets using market-based

means, such as raising short-term interest rates of Renminbi in interbank markets in order to increase costs for

short-selling Renminbi and stabilize exchange rate in offshore markets.

Any thing related to the exchange rate of Renminbi has to be taken seriously. Today, Renminbi is not longer yet

another Plebeian currency like it was 20 years ago. Any significant fluctuation of this currency will become a global

headline. In this context, we must emphasize the importance of stabilizing exchange rate. The first half of 2017 will

be a critical period, and we must prevent issues like fund outflow and exchange rate of Renminbi to become focus of

attention in the media. Strategically, if we stay calm and steadfast, the exchange rate and capital flow will eventually

settle down, creating an amicable external environment for China’s economic development.

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Yuan Gangming: correcting serious structural imbalance is the only way to steady growth

China’s economy maintained a growth rate of 6.7% in all quarters of 2016 and the yearly growth slowed

down by 0.2 percentage point compared with the previous year, making it the smallest slowdown in the past three

years. However, we have paid huge prices for our reliance on the skyrocketing real estate industry and on state

investment to boost growth. Structural imbalance and potential risks have worsened, bringing heavier downward

pressure to the economic performance of the future.

In 2016, housing prices of the first-tier cities among 70 large and medium-sized cities in China increased by

30% year-on-year, which was the sharpest increase in recent years. Skyrocketing housing prices have brought

about large price hikes of real estate-related raw materials and both future and spot prices of coal, steel and iron

ores have increased by 60-70%. Soaring housing prices have created huge profits to real estate developers, dealers,

speculators, local coffers and related industries. All kinds of funds including bank loans and money raised from

markets have been poured into real estate, causing serious imbalance in resource distribution. The increase of real

estate loans has been faster than the increase of all loans in general and the imbalance has been worsening. In the

first three quarters of this year, real estate loans increased by 25.2%, 12.2 percentage points higher than the

increase of all loans in genera, and seven percentage points faster than the increase in the same period of last year.

Real estate loans account for 24.3% of all the existing loans and 42.5% of the newly increased loans, up 2.4 and

14.1 percentage points respectively over the same period of last year. In July, newly increased personal loans used

for house-purchasing accounted for 98.7% of all newly increased loans. Almost all the newly increased loans were

used by house-buyers, leading to decrease of loans used by production and business enterprises. In November,

newly increased loans used by individuals to buy houses accounted for 71.6% of all the loans, while newly

increased loans to production and business enterprises decreased by 20.8%, among which the ratio of short -term

working capital loans dropped to 5.4%. Most of the newly increased loans were used by real estate developers and

house-buyers and real estate prices and prices of related investment products rocketed due to influx of fund, while

manufacturing and other real economies face survival difficulties due to insufficient fund. The crazy increase of

housing prices at the end of 2009 led to drastic expansion of related industries. Overcapacities in coal, steel, iron

ore industries constitute heavy downward pressure on the economy. Housing prices saw a new round of

skyrocketing hike in 2016, making the dwindling excess production capacities to expand again, adding more

downward pressure on the economy. Related department has claimed that the rise of steel and coal prices was the

result of implementation of the de-capacity policy. This claim is inconsistent with the facts. Overcapacity

industries such as steel, coal and cement industries already reduced their capacities in 2015 due to slow real estate

market. The destocking policy of the real estate sector increased leverage of house-purchasing loans, boosted

sharp hikes of prices of housing and related products and disrupted the adjustment and rational price lowering of

the real estate market and the self-conducted adjustment of related industries on cutting their excess production

capacities. In 2016, output of crude steel and cement increased by 1.1% and 2.7% respectively, in comparison with

-2.3% and -4.9% respectively in the previous year. Iron ore output decreased by 3.6% in 2016 while in 2015, the

decrease was 7.7%. The coal industry was the only one that maintained its momentum of reducing production

under the pressure from the market, and the reduction increased from 3.5% in 2015 to 10% in 2016. If real estate

speculation mania resurges, overcapacity industries will expand again very quickly, brining new and greater harm

to economic performance.

It was pointed out in the Central Economic Working Conference that major structural imbalances in the


Chinese economy are causing obstructions in economic circulations. Analysis from the macro-economic perspective,

for many years, massive government-lead investments have led to excessively high investment rate, causing serious

structural imbalance that is more harmful than excessive expansion of real estate. Since the massive investment

stimulus measures in 2009, investment rate has soared to over 46%. In 2015, investment rate was 44.9%, which was

far higher than the investment rates of other countries which are around 25% and than the average between 1978 and

2008, which had never exceeded 40%. Investment rate soared between 2008 and 2015 from 43% to around 45%, but

economic growth slowed down from 9.6% to 6.9%. According to the State Statistics Bureau, the contribution rate

of consumption is 71% at present, higher than the contribution of investment, indicating that consumption plays a

major role in economic growth, and the contribution of investment is not that high. From another perspective

however, investment ratio was as high as around 45%, but its contribution to economic growth was only 29%. The

disproportionately low contribution of investment in economic growth has a lot to do with the excessively high

investment rate and the irrational investment structure. Many people think that large scale infrastructure construction

led by the government can not only improve basic support for economic development, but also can expand project

construction and market demand for equipment manufacturing, thus providing powerful support for growth.

However, disproportionately high investment in infrastructure leads to excessively long investment fund cycle and

obstruction in economic circulation. Since 2008, fund turnover period of large banks has extended to twice as long

as before and marginal productivity of investment (GDP increment/investment) has fallen from 0.36 to 0.16.

Investment benefit has dropped by about a half, so has been economic growth rate. Large scale infrastructure

investment by the government and too much long-term housing loan by residents cause serious imbalance in

structure of resources allocation. Since the later half of 2015, housing mortgage loans of residents skyrocketed,

leading to increase of proportion of medium and long-term loans from 55% to 57.8%. New monetary easing tools,

mainly guaranteed by government bonds and policy bank assets, make more and more the newly added currency be

used conveniently in government’s infrastructural facilities and other large products, while it has become

increasingly difficult for private enterprises to get loans from banks in addition to suffering from relentless treatment

by the banks including frequent loan withdrawal, delaying and suspension. From January to November 2016,

infrastructural investment and investments in state-owned projects grew at accelerated rate of 8.9% and 20.2%

respectively, while investment in manufacturing and private investment were squeezed to 3.6% and 3.1%. Real

economy and private economy have deteriorated at drastic speed and the Chinese economy has regrettably lost its

dynamics of growth.

Without correction and rectification of the serious structural imbalance, it is impossible for the economic

growth to stop deceleration and be stabilized. Newly released PMI was 51.3%. According to the State Statistics

Bureau, PMI has been over 50% for five consecutive months and indexes of subentries such as production and new

orders have been much higher than 50% and the trend of a steadier economy has been consolidated. However, the

statistics bureau has not mentioned the index of purchase prices of raw materials, which has seen the largest growth

among the subentries of the PMI index. The index of this subentry was a whopping 69%, far higher than those of

production, operation and other subentries. Obviously, the surge of prices of coal, steel and other raw materials was

the result of skyrocketing housing prices, which indicates increased risks aggravated by speculative bubbles

constitutes new threats to the stable performance of the economy. Next step, the unavoidable bubble deflating

measures will inevitably bring about another round of economic slowdown. In December, steel PMI dropped to

47.6%, setting off alarm for tumbling steel prices. Economic growth in 2017 may fall to somewhere between 6.5%

and 6.3%.

Only through clear recognition of the serious structural imbalance and making corresponding corrections,


can we hope to realize sustained and steady growth of economy. We should speed up implementing the

instructions made in the Central Economic Working Conference and correct the development direction of the real

estate sector from speculation-centered to serving the housing needs of residents. We need to cancel policy support

for loans to real estate sector, lower the proportion of loans into real estate, speed up implementation of property tax

and eradicate speculation of real estate. We need to change investment method, lower excessively high investment

rate, reduce large scale investment by the government, facilitate financing of private investment, promote

adjustment and enhance efficiency of investment structure and support balanced and steady development of the

economy.

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China and World Economic Research Center, Tsinghua University 1

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Documents

China’s Macroeconomic Analysis and Forecast for 2017 · to focus on preventing the risk of currency devaluation and capital outflow, speed up the pace of cutting industrial overcapacity