China's economic growth will slow to 6.5 percent in 2017: think tank

An employee works at a steel factory in Dalian, Liaoning Province, China, June 27, 2016. Photo: Reuters 

A new study said that China's economic growth will slow to 6.5 percent in 2017 and its currency will continue falling against the dollar.

The study, which is conducted by the Chinese Academy of Social Sciences (CASS), a top Chinese think-tank, warned that the economy of China would also face increasing downward pressure next year.

The CASS predicted that yuan currently hovering around eight-year lows would lose another three to five- percent against the dollar.

The report was released several days after Chinese leaders wrapped up a key economic meeting known as the Central Economics Work Conference, which upgraded "seeking progress while maintaining stability" to an unprecedentedly high level-from a methodology for economic work to an important principle for governance.

During the conference attended by President Xi Jinping, the leaders vowed to fix the problems ailing the economy, taking aim at sclerotic state-owned enterprises and property speculation that has raised fears of a massive bubble about to burst.

President Xi has said that he wants expansion to average at least 6.5 percent in the five years through 2020 to achieve the Communist Party promise of building a "moderately prosperous society" by that year with gross domestic product and income levels double those of 2010.

According to the CASS, the economy expanded 6.7 percent for three consecutive quarters in 2016, the slowest pace since the global financial crisis unfolded eight years ago.

Last year, CASS predicted that China's economy would grow at a rate of 6.7 percent.

Now, the prediction of 6.5 percent plumbs the lower depths of the national goal of between 6.5-7.0 percent. It would be the lowest annual figure since 1990 when it clocked in at 3.9 percent.

The think-tank cited several factors which have helped China's economy stay on target including "stabilization of consumer spending growth, a pick-up in real estate investment growth, and robust infrastructure spending."

Huang Yiping, an adviser to the People's Bank of China, said that China should set a more flexible 2017 economic growth target to give policy makers more room to enact reform.

He proposed a range of 6 percent to 7 percent for this year, compared with the 6.5 percent to 7 percent objective in 2016.

"The 6.5 percent target is just an average rate," Huang, an economics professor at Peking University, said. "As long as employment is stable, a slightly wider growth target range in the short term will reduce the need for pro-growth efforts and give policy makers more room to focus on reforms."

Huang said that a large number of "zombie companies" remain economically inviable yet still manage to survive on government and bank assistance, bringing down the overall efficiency of resource allocation in the economy.

"We think that the arbitrary growth target will be given up -- if not in 2017, then definitely in 2018," Yao Wei, chief China economist at SocGen in Paris, said in a note. "The harm of keeping it is all too apparent, for it has become not only an impediment to the necessary structural adjustments but also a culprit behind rapidly rising debt risk."

One of the most explicit signals that Chinese leaders are more willing to tolerate below-target growth is their mention of a neutral monetary policy stance in the statement issued after the Central Economic Work Conference, Yao wrote. That policy stance has officially shifted from easy to neutral, and authorities are determined to contain asset bubbles and financial leverage, she wrote.

The People's Bank of China has held its benchmark interest rate at a record low for more than a year. But it has allowed a steady increase in money market rates to squeeze leverage in the financial system, using reverse-repurchase operations to raise funding costs.

"In light of the trajectories of growth and inflation, it is indeed time for the PBOC to shift its stance to neutral," Yao wrote. "A neutral monetary policy stance does not necessarily mean policy rate normalization, while no policy rate hikes can still mean quite some tightening."

Smooth re-balancing

In addition to slowing growth and rising debt, top officials are also trying to manage a smooth re-balancing from the old growth drivers such as manufacturing and construction as new ones like consumption struggle to compensate. Meanwhile, policy makers are focusing more on safeguarding the financial system.

Preventing and controlling financial risk to avoid asset bubbles will be a priority for 2017, along with deepening supply-side structural reform, top party officials said recently after their annual gathering of the Central Economic Work Conference to decide on policy goals.

Still, Huang said that the exchange rate of the yuan will be largely affected by investors' expectations about growth, as the government faces some difficulties supporting it even though the nation has sound economic fundamentals and huge foreign exchange reserves. Capital outflows will "last for a certain period" as more Chinese residents look overseas to diversify their investment portfolio, Huang said.

Capital outflows have been a growing concern for the government in the past year as it attempted to put the economy back on track and keep the currency stable without exhausting its reserves, which tumbled to $3.052 trillion in November, the lowest in almost six years.

The State Information Center (SIC) said in an article that China "should appropriately control capital outflows... keep tight control over state-owned firms' overseas investments in property, antiquities, sports teams" and other non-core or non-technological transactions.

China's foreign exchange regulator said late on Saturday that from the start of the year it would step up scrutiny on individual foreign currency purchases and strengthen punishment for illegal money outflows, although the $50,000 annual individual quota will remain unchanged.

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