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17 Nov 2017

International Economy

Chinese economy experiences slowdown but remains sturdy, paving the way for the government to step up its implementation of reforms (Business Brief No.3712 Full Ed.)

The latest set of economic indicators unanimously point to a Chinese slowdown, whether in terms of production, investment, or consumption. Indeed, industrial production for October grew 6.2% YoY, slowing from September’s 6.6% expansion. At the same time, fixed-asset investments year-to-date (YTD) expanded 7.3% YoY, down from 7.5% YoY over the first nine months. Furthermore, retail sales grew 10.0% YoY, decelerating from 10.3% YoY the previous month.

While the majority of October’s economic data adjusted downward from September, the slowdown over 4Q17 is in line with projections by KResearch and is still consistent with a positive outlook for the Chinese economy. More specifically, the slowdown is likely within the scope of policy makers’ intention to, having delivered a reassuringly strong growth in the lead-up to the Communist Party Congress, shift attention to enacting structural reforms. Moreover, annual growth will be aided by the strong performance over the first three quarters. As a result of the aforementioned factors, despite the slowdown observed, the Chinese economy is still likely to achieve annual growth of no less than 6.7% YoY, as predicted earlier by KResearch.

The Chinese authorities have warned of three key risks to the economy, namely a property market susceptible to bubble formation, the excessive growth of credit and indebtedness, and the inefficiencies of certain state-owned enterprises (SOEs). To combat these, the Chinese policy makers have already enacted some measures, for which tangible results have begun to show. Success in the aforementioned two issues however, is juxtaposed with the situation regarding SOEs, which has thus far seen only limited improvement.

One goal of the economic reform stressed by Chinese policymakers has been reducing the share of SOEs in various industries. However, despite measures such as the amalgamation of some SOEs and debt-to-equity swap schemes, results have been limited. The SOE revenue shares have under some circumstances, actually increased. With regard to the Normal industries, the area where privatization could occur most easily, the SOE revenue share has only dropped marginally. All this indicates more work is needed with regard to SOE reforms.

KResearch expects Chinese policymakers will prioritize SOE reform as a major short-medium term goal throughout 2018. Said reforms will likely focus on reducing the number of SOEs and/or privatization efforts, particularly with SOEs within the normal industries such as the tourism or pharmaceutical industries.

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International Economy