China Ready For Slower Growth And Tighten Policy

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China’s economic growth is expected to cool in 2017 as its top leaders flag tighter monetary policy and further curbs to clamp down on asset price bubbles, especially in the property market, even as a sharp drop in the yuan has fed fears of markets turmoil.

The Chinese Academy of Social Sciences yesterday forecast China’s economic growth will slow again next year to 6.5%, which would be the slowest pace in more than 25 years, down from expected growth of around 6.7% for this year.

The anticipated slowdown in the world’s second-biggest economy comes at a time of heightened anxiety about the yuan, which slid to over eight-year lows last month on speculation of capital outflows in the wake of Donald Trump’s US election victory.

On top of that, a rapid rise in bank lending, a dangerous build-up of debt in the corporate sector and a property market that has failed to fully flush out speculators are threatening to derail the economy.

That probably explains why China’s top leaders, who held a key meeting on the economy last week, chose to stick to a “prudent and neutral” monetary policy in 2017, while vowing to keep the economy on a path of stable and healthy growth.

Indeed, an adviser to the People’s Bank of China said that the tone set by China’s top leaders for 2017 means the current monetary policy can be tightened. Sheng Songcheng said there would be no grounds for easing next year considering risks from exchange rate volatility, rising inflation, the stock market and the property market.

Data yesterday showed growth in China’s home prices slowed again in November, suggesting government curbs were starting to pay off, although it was too early to say if the slower trend will persist given a supply shortage in some of the bigger cities.

Analysts expect Beijing will start to remove some of the policy accommodation.

“We believe there will be some change from the current relatively loose monetary policies (to a more neutral stance), and the change will start to show up from the third quarter next year,” said Wang Jianhui, an economist with Capital Securities in Beijing.

Wang cites potential risks from capacity reduction efforts including an increase in bad loans and a rise in unemployment.

He expects the industrial capacity reduction campaign will expand from coal and steel currently to more industries including cement.

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