Economic growth momentum in the Mainland remained steady in 2017 and this trend is expected to continue through 2018. GDP rose 6.9% in the first three quarters of 2017, driven largely by rising domestic consumption expenditure that contributed some 65% to the total growth (see Chart 1). This robust consumption growth is due in part to rising incomes (8.3% YoY through the first three quarters) and low inflation (averaged 1.5% YoY through the first 10 months), which together have stimulated higher purchasing power.

Against this background, retail sales enjoyed double-digit growth through the first 10 months, while soaring online retail sales achieved 28.8% YoY growth during the same period (see Chart 2). Assuming that income growth can sustain its momentum, these trends should continue and remain the key contributor to the growth of the Mainland’s economy.

Rising industrial profits are also stabilizing the economy. Investment growth, however, continues to slow as fixed asset investment (FAI) growth fell to 7.3% YoY through the first 10 months – the lowest level on record (see Chart 3). With increasingly stringent lending requirements suppressing real estate investments, FAI growth is expected to be lacklustre in 2018. While this is consistent with the country’s shift towards a consumption-driven economy, economic growth could also be affected if investment growth shrivels further.

Faced with lingering external uncertainties, the Central Government is expected to continue deploying both fiscal and monetary policies to limit negative shocks. As a result, the decline in investment growth should be moderate.

In terms of fiscal policy, in order to reach the country’s target of doubling the 2010 real GDP figure by 2020, we anticipate the Central Government will continue to support projects in new industries including environmental protection, smart manufacturing, and innovation and technology.

Such an approach will be re-emphasized in future official announcements, including during the Two Sessions in March, the annual Government meeting where key economic targets are usually announced. Among other indicators, the reiteration of a targeted budget deficit will reaffirm the Beijing Government’s expansionary fiscal stance (see Chart 4).

As far as the monetary market is concerned, the lending spree of financial institutions continued in 2017. Liquidity has been kept abundant, with new aggregate financing and bank loans soaring 16% and 14.4% YoY through the first 10 months respectively (see Chart 5). This – together with the People’s Bank of China’s earlier announcement that it would lower the required reserve ratio for certain financial institutions – means that the monetary environment should remain accommodative in 2018.

Looking to the medium term, President Xi Jinping identified deepening structural reforms as a key priority of the country’s policy agenda during his address to the 19th National Congress in October.

Further liberalization measures are expected, as senior government officials have said that expanding the role of market forces in the economy is a top priority. In fact, some measures to remove barriers to entry in certain sectors – such as banks, insurance and asset management – have been announced since the close of the 19th National Congress.

Looking ahead, we expect there will be an acceleration of the cutting of obsolete production capacity in polluting industries, which will also help optimise the allocation of scarce resources of labour and capital.

In its recent issue of the World Economic Outlook, the IMF said that there is “a heightened probability of a sharp growth slowdown in China, with adverse international repercussions.”

Contrary to such an assessment, we are of the view that, given the macroprudential measures in place and the country’s efficiency when it comes to executing policy, a sharp slowdown in the Mainland economy is not likely.

Our baseline scenario projects that the Mainland’s GDP will expand some 6.6% in 2018, 0.2 percentage points lower than the 6.8% YoY growth for the full year of 2017. The small decline is due largely to the expectation that investment growth will see moderate deceleration, despite steady momentum in consumption and export growth.

While we are confident that the Mainland’s economy will fare well, some risk factors are present and may affect outlook and sentiment in the medium term.

External uncertainties are the key risk to the outlook of the Chinese economy, particularly the threat of trade tensions with the U.S. These could arise as a result of, for instance, memoranda issued by U.S. President Donald Trump last year regarding steel imports from China and IP rights. Another potential source of conflict is the fact that the U.S. submitted a statement to the World Trade Organization formally opposing granting market economy status to the Mainland.

If such downside risks materialise, the demand outlook for Chinese products could falter.

Meanwhile, as the Central Government is expected to run a budget deficit to support the economy in the near term, these actions could lead to a rising debt trajectory. This has been a concern for international investors in the past and has caused net capital outflows.

In order to tame such concerns, policymakers will be pressed to move on from a deficit-led growth model and curb the expansion of its monetary base sooner rather than later, which will in turn drag economic growth.

Such medium-term risk factors, however, are not expected to come into play in 2018.