Economic Update


Overview of the 19th National Congress

At the opening of the 19th National Congress of the Communist Party of China (CPC) on 18 October, President Xi shared his vision to make the country a global economic leader by 2050, as he envisioned that such development would be sustained by a thriving middle class, among other favourable factors.

Certainly, he was not being unrealistically optimistic, as he flagged that the “imbalanced and inadequate” growth of the Chinese economy would be the main challenge at the current stage of economic development. He followed by suggesting that growing income inequalities, along with weak innovation capabilities and shortcomings in environmental protection, were some key concerns.

Developments to watch

After a week of meetings, the CPC laid out an economic agenda that puts much emphasis on achieving continued, balanced and comprehensive growth.[1] Against this background, we consider the following areas worthy of attention:

1) Deepening supply side reform

Deepening supply side reform was mentioned repetitively in this Congress.

In general, supply side reform is considered a way to optimise the allocation of scarce resources of labour and capital, and accelerate technological development in the country. All the more, supply side reform is also considered a solution to the meagre profitability of industries (see Chart 1),[2] through the channels of industrial and manufacturing capacity upgrading.

To accelerate such reform, supportive measures are expected to be introduced by the Central Government to stimulate industrial upgrading in some targeted sectors (e.g. environmental and advanced manufacturing), likely by means of offering fiscal incentives (e.g. tax reliefs).

Meanwhile, we believe both the Central and local governments may inject more money into the real economy through investment in infrastructure projects. According to the communiqué, policymakers are determined to set aside more resources to enhance infrastructure networks (power grids, information and communication technology networks, logistics networks and the like). As a result, investment activities, which have seen growth slowing down in recent years, may get more support over the medium term.

2) Investing in innovation

It is apparent from various press conferences and relevant official communiqués that the modernization of the services sectors sits atop the policy agenda, with focuses being put on shaping the overall economy to become more innovation-driven.

According to the National Bureau of Statistics, research and development (R&D) expenditure in the Mainland surpassed RMB 1.5 trillion in 2016, representing 2.1% of the Chinese economy (see Chart 2). This has put the Mainland in the ranks of Belgium (2.5%), France (2.2%) and the Netherlands (2%), but it is still behind Korea (4.2%), Japan (3.3%) and the United States (2.8%), suggesting that there is ample room for improvement.

Therefore, with the support of the top leaders, we expect R&D’s share of the country’s GDP to increase steadily over this new term of the Government. During the course of such development, more favourable policies could be introduced and implemented. As a whole, we expect a stronger investment wave targeting at strengthening the country’s innovation capabilities, which may be done through increased incentives for relevant investment activities.

If the R&D’s share of GDP increase to, say, the level of the U.S. in 2022, the R&D expenditure in the Mainland will reach RMB3,382 billion, representing an increase of 116% against the 2016 level.[3] Not to mention the indirect benefits resulting from R&D investment, the increased R&D activities by themselves would be an eminent driver of growth for China’s economy over the medium term.

3) Containing property prices

In his work report, President Xi stated that “houses are built for people to live, not for speculative transactions”, echoing the recent proliferation of cooling measures in an attempt to tame the property market. In fact, with the introduction of a wide variety of property market cooling measures – such as raising borrowing costs, imposing purchase restrictions, increasing down payment requirements and price intervention – and the determined rhetoric of top leaders, property price hikes have moderated somewhat in recent months (see Chart 3).

Given the President’s statement, cities that have already implemented the aforementioned measures will unlikely see any loosening in the near future. At the same time, the introduction of similar measures in other second tier cities may become more frequent, as local governments would proceed to synchronise with the Central Government’s policy framework. As a result, upside of property prices in first and second tier cities should be limited in the near term.

Looking ahead

In short, it is quite clear that policymakers will focus on deepening structural reforms and adopting deleveraging measures only if necessary.

A case in point is that, when Tuo Zhen, the spokesperson of the 19th National Congress, addressed the issue of the highly leveraged nature of the economy at a press conference, he suggested that some measures would be introduced to reduce leverage of the economy, assuming that it would not lead to any negative impact on the economy.[4] This, together with the recent comments made by Zhou Xiaochuan, the Governor of the People’s Bank of China (PBoC),[5] helps ratify the PBoC’s recent instruction to lower the required reserve ratio for selected financial institutions. The sequence of events implies that deleveraging – comparing to growth – is not a top priority of policymakers.

[1] Xinhua (24 October 2017)

[2] Profitability of industries remains low at about 6%, using total industrial profits as a percentage of total industrial sales revenue as a benchmark

[3] Based on the IMF’s latest forecast that Mainland China’s GDP will reach RMB120,795 billion in 2022

[4] Xinhua (17 October 2017)

[5] State Council (20 October 2017)


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