Meanwhile, the geographic profile of growth is also changing, with inland regions picking up even as coastal provinces slow. In one striking contrast, the GDP of Liaoning, the largest of three north-east industrial provinces, shrank last year (-2.2% Q3 ytd) while that of Chongqing, fast becoming a major production hub in south-west China, grew in double digits (+10.7%)1.
All this points to resilience as the focus on “supply-side structural reform” intensifies in the run-up to the 19th Communist Party Congress in the autumn, after which Xi Jinping will have unprecedented political capital to pursue this ideology as the cornerstone of the 13th Five Year Plan (2016-2020). It also suggests a certain flexibility may be possible in formerly sacrosanct economic policy commitments, such as the annual GDP growth target, due to be announced at the National People’s Congress in March. The State Council may widen the target range to 6%-7% from 2017 onwards, allowing a degree of breathing room while also delivering the growth needed to fulfil another core promise: to double GDP per capita between 2010 and 2020.
…and internationally resolute
More nimble policy will also be required to deal with China’s external challenges in 2017. For one thing, these complicate the delicate task facing China’s authorities of managing currency volatility and stemming capital outflows without jeopardising international confidence in the country’s capital markets, or the hard-won status of the renminbi as a global investment currency.
This is partly because China can’t have everything it wants. It can’t control its own money supply, exchange rates and interest rates and allow free capital flows across its borders. It may have taken some steps to re-impose limits on such flows (such as restricting certain types of outbound M&A) but the reality is Chinese corporates and financial institutions are already part of the global marketplace. The movements of funds associated with trade, M&A, portfolio investments, and cross-border financing are becoming unavoidable.
To prevent further depletion of foreign exchange reserves, it may be necessary to float the yuan. It may be that this degree of policy flexibility is too much to expect in 2017. And with US$3trn in reserves still at its disposal, few can doubt China still has the firepower or resolve to defend the renminbi against most, if not all speculation. Yet the reality of cross-border flows -- and the costs of defending against them -- are only likely to become more apparent in 2017.