China GDP hits 2016 target as Trump headwinds loom
Stimulus averted hard landing but financial and geopolitical risks are building
by: Gabriel Wildau in Shanghai, Tom Mitchell and Yuan Yang in Beijing

China’s economy avoided a hard landing in 2016 thanks to robust monetary and fiscal stimulus, but policymakers are now bracing for headwinds as a possible trade war looms under the US presidency of Donald Trump.

China’s gross domestic product, the world’s second-largest in nominal terms but already the largest at purchasing power parity, grew 6.7 per cent for the full year and at an annual rate of 6.8 per cent in the fourth quarter in real terms, down from 6.9 per cent in 2015. It was the slowest full-year growth figure since 1990 but comfortably within the government’s target range of 6.5-7 per cent. The fourth-quarter performance topped economists’ expectations of 6.7 per cent, according to a Reuters poll.

In a speech to the World Economic Forum in Davos on Tuesday, Mr Xi defended free trade and globalisation, drawing an implicit contrast with Mr Trump. Economists say a trade war could exact a heavy toll on China.

“I believe that, once he is in position, Mr Trump will consider the issue from the perspective that both sides benefit, and he will expand the co-operation that the two countries have long had,” Ning Jizhe, director of China’s National Bureau of Statistics, said on Friday.

Zhu Haibin, chief China economist at JPMorgan in Hong Kong, notes that gross exports are more than 25 per cent of Chinese GDP, while labour-intensive export industries are disproportionate sources of employment. That means that large swaths of workers could be affected if exports suddenly fell.

“China is a very export-orientated country. Many people work in these areas. If you have a 10 per cent decline in exports to the US, that will affect lots of workers,” said Mr Zhu.

While employment would suffer from a trade war, the impact on GDP would be less severe, economists say. With imports falling alongside exports, net exports — the variable that directly affects GDP — would be little affected.

Beyond a trade war, the main threat to China’s economy is continued reliance on debt-fuelled investment to drive growth, economists say. Lower exports could force policymakers to rely even more heavily on this model to defend its growth target.

In a sign of how China’s traditional growth drivers are faltering, fixed-asset investment — which includes spending on new factories, housing, and infrastructure — grew at 8.1 per cent, the slowest pace since 1999, Manufacturing was the biggest drag, as private factory owners held off on expansion amid weak demand and excess capacity.

But housing was a bright spot. Property sales grew 22.5 per cent in floor-area terms, the fastest pace in seven years, while prices in major cities soared, prompting warnings of a bubble. Analysts expect the housing market to slow in 2016, as the government moves to cap runaway house prices that are a source of popular anger.

In May, a widely cited opinion piece in Communist party mouthpiece People’s Daily by an “authoritative person” — presumed to be a senior adviser to Mr Xi — warned that the economy remained dangerously reliant on debt. At the time, analysts thought the article would signal a policy shift, but strong credit growth continued for most of the year.

“The excess money supply in 2016 created problems with bubbles. Going forward, more deleveraging will be necessary. Monetary policy can’t be loosened further,” said Zhang Yiping, economist at China Merchants Securities in Beijing.

Meanwhile, progress has been slow on politically difficult reforms such as shuttering inefficient “zombie” companies and overhauling property rights for rural land.

With the Communist party due to meet at the end of 2017 to pick its top leaders for the next five years, economists broadly expect another year of muddling through. Few believe Mr Xi will tolerate the short-term growth slowdown that would result from more aggressive reform measures while he seeks the political leverage necessary to place his allies in key positions.

Additional reporting by Ma Nan

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