With the 19th Party Congress scheduled for later this fall, 2017 is a pivotal, and political, year for China.
The meeting, a closed-door process that takes place once every five years, will see the country transition its leadership at the highest levels. While current president Xi Jinping is expected to stay on for a second term, over 200 members will be reshuffled, and it will likely hold crucial first hints to the long-term direction of the party, said think tank Global Policy Watch. This includes who may eventually be Xi’s successor or whether he plans to stay past 2022, breaking the informal two-term limit to which the party has adhered in recent decades.
As a result, economic policy for the time being is geared toward maintaining stability.
“The government is not in the mood to inject new stimulus,” said Daiwa Capital’s Kevin Lai and Olivia Xia. “Local governments are not in the mood to think about new investments either, as the leadership transition will not be certain until after the congress.”
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Last week, the International Monetary Fund raised its full-year China GDP growth forecast to 6.7 percent from 6.2 percent on the back of better-than-expected growth in the first half of the year. China’s economy expanded 6.9 percent, above Beijing’s full-year target of 6.5 percent. However, its evaluation also put a red flag on the country’s mushrooming debt levels, which reached $28 trillion at the end of 2016.
The IMF said the Chinese government was relying on extending credit in order to meet its growth targets and average real GDP growth in the five years to 2016 would have averaged 2 points lower than the 7.3 percent it recorded, were it not the case.
“International experience suggests that China’s current credit trajectory is dangerous with increasing risks of a disruptive adjustment,” it warned.
A Deutsche Bank report found that short-term consumer credit had entered a state of frenzy, as the government adjusted down its corporate debt levels. The former is growing 35 percent year-over-year, and could accelerate to 40 percent year-over-year by December.
“China has never really had a ‘consumer credit cycle’ before so the question as to whether the banks can manage consumer credit risk effectively is likely to be tested at some stage in the next few years,” the report said.
The Chinese government has been tackling a rebalance of the Chinese economy from industry to one led by consumption and services.
According to state media Xinhua, consumption accounted for 63.4 percent of GDP growth in the first half of 2017, compared with 44.7 percent during the same period in 2010, and is expected to exceed 70 percent this year.