BEIJING, May 31, 2018 - Economic activity in China remains resilient, with GDP growing by 6.9 percent in 2017 and 6.8 percent year on year in the first quarter of 2018. Consumption continues to drive growth. Growth is projected to moderate to 6.5 percent in 2018 and 6.3 percent in 2019-20, according to the World Bank’s new China Economic Update released today.
“While China is on a long-term path of slower capital accumulation, investment growth has rebounded from the lows in 2017, particularly in the private sector. Real investment grew by just 5.5 percent in 2017 as compared to 18 percent per year in the decade before 2011,” said John Litwack, World Bank Lead Economist for China. “Nevertheless, the level and growth rate of investment are still high by international standards. The efficiency of allocation, and not the speed of growth, is China’s main investment challenge.”
China’s current account balance continues to fall as the economy’s dependence on exports declines. Mainly due to stronger goods and services imports, the surplus declined to 1.3 percent of GDP in 2017 and moved into a small deficit in the first quarter of 2018. In 2017, China also experienced more balanced capital flows. The Renminbi has continued to appreciate, weathering the emerging market turbulence in mid-April 2018 relatively well.
Monetary and regulatory tightening has already shown some results. Corporate leverage has stabilized below 160 percent of GDP in 2017. Several new measures, including an overhaul of the rules for asset management products, indicate the authorities’ commitment to addressing financial vulnerabilities.
Fiscal policy was accommodative in 2017, with growth in local government capital spending particularly strong. However, some of the increase in budgetary spending likely compensated for lower off-budget investments as implicit public borrowing through local government financing vehicles was restricted. While the projected 2018 consolidated fiscal deficit is similar to that in 2017, a stricter enforcement of measures to limit off-budget borrowing for public projects will likely imply a further tightening in the overall fiscal stance of general government.
Several factors are expected to slow the pace of economic activity in the near term: a relatively tighter monetary and fiscal policy mix, more moderate growth in global trade, continuing reforms to address industrial overcapacity and environmental sustainability, and measures to reduce the macroeconomic vulnerabilities accumulated in recent years. Rebalancing toward more consumption-and-services-led growth is also expected to continue.
While net exports contributed to growth in 2017, this contribution is expected to decline this year as global import demand moderates, says the report.
Moreover, rising trade tensions are one of the main risks to China’s outlook. The economic impact of recently announced US trade measures would be manageable, but the costs of investment restrictions—in terms of limited access to foreign technology and skills—could be significant. The bigger risk for the world economy, as well as for China, would be a major weakening of the rules governing global trade and investment and an unraveling of global value chains.
“A measured response to the trade measures, consistent with WTO rules, and continued dialogue with the US can minimize this risk," said Elitza Mileva, World Bank Senior Economist and the main author of the report.