2018: A Year of Quality Growth

By Shen Jianguang

In terms of macroeconomic policies, authorities will maintain a prudent and neutral monetary stance with a proactive fiscal

China's economic growth exceeded expectations in 2017, putting a halt to the year-onyear slowdown seen since 2010. The rare combination of a global economic recovery and an improved foreign trade environment helped turn net exports into a positive contributor to growth from a negative one.Meanwhile, domestic consumption held steady and there was gradual progress in the transformation and upgrading of the economy.Investment growth slowed due to deleveraging, but the rapid growth of the service sector, especially the new drivers of growth such as the Internet, mobile payment and new energy sources, put in a positive performance.

The 19th National Congress of the Communist Party of China,held late last year, stressed that unbalanced development was a critical issue facing China. Economic policy should shift from emphasizing rapid growth to the pursuit of highquality growth, and this should be the main thrust of China's economic development in future. The Central Economic Work Conference at the end of 2017 made it clear that promoting high-quality development was a necessary requirement for maintaining healthy and sustained economic development. In the future the emphasis will be on deepening supply-side structural reforms, reducing existing economic and financial risks and preventing new ones, controlling pollution and relieving poverty. This could have an impact on economic growth in 2018.

The financial sector should serve the real economy

It is likely that China's economic growth in 2018 will continue the decelerating trend evident since the fourth quarter of 2017. The global economic recovery will continue to boost China's export rebound.Wages and restructuring will support consumption. New areas of economic momentum will play an active role. However, given the series of tightening policies and the deepening of financial de-leveraging, the gradual increase of real estate control policies and the intensification of pollution prevention and control, the growth rate of investment may slow further.The nation's economic growth rate is expected to slow to 6.3% in 2018 from 6.9% in 2017.

In terms of macroeconomic policies, authorities will maintain a prudent and neutral monetary stance with a proactive fiscal policy.After the 19th National Congress, a series of tough regulatory measures were introduced. The State Council Financial Stability and Development Committee was set up, new rules for the asset management business were introduced, the establishment of new networks for micro financing were temporarily halted and there were new controls on real estate funds. These all demonstrated the conviction of economic decision makers to continue efforts to deleverage. In addition, with the overall shift in monetary policy of the world's central banks, it is expected that China's monetary policy will be stable to slightly tighter in actual implementation this year.

Authorities will continue with their proactive fiscal policy. However, the Central Economic Work Conference proposed that China should adjust and optimize the structure of its fiscal expenditures to ensure sufficient support for key areas and projects. It should be noted that in the context of monetary tightening, positive fiscal policies may be subject to some restrictions in the implementation process. Therefore, coordination between monetary and fiscal policy is particularly important.

As for the exchange rate, the downward pressure on the renminbi has eased significantly as a result of a weaker dollar. Taking into account Trump's tax reforms in the medium term as well as the strong economic recovery and reduced political risk in Europe, the author expects the US dollar to remain weak in 2018.Meanwhile the euro will extend its strengthening trend and will be seen as a strong currency throughout 2018.This will further ease depreciation pressure on the renminbi and reduce the prospects of large-scale capital outflows. Foreign exchange reserves are expected to increase further.An improving external environment will create a better timeframe for promoting supply-side reforms.

The launch of a real estate longterm mechanism is anticipated in 2018. The Communist Party's Political Bureau meeting held at the end of 2017 listed accelerating housing reform and building a longterm development mechanism as one of the key tasks for 2018.Ning Ji Zhe, deputy director of the National Development and Reform Commission (NDRC), said in a recent statement that the long-term mechanism is being formulated and will be introduced in due course.Finance Minister Xiao Jie, in his recently published To Speed up the Establishment of a Modern Financial System, stated that real estate tax legislation will be in accordance with legislative precedence, with full authorization and in a gradual manner. This will signal a speed up of plans for the implementation of the long discussed real estate tax. The Central Economic Work Conference stated it is necessary to maintain continuity and stability in real estate market regulatory and control policies. It also said there was a need to distinguish between central and local authorities with their different areas of regulation and control. This will set the tone for real estate reform in 2018. From a practical point of view, current policies on real estate taxes, joint property rights and support for leasing activities in the housing market are being accelerated.The long-term development mechanism for the real estate sector has begun to take shape.

Financial reform will be promoted at a relatively swift pace. In his article Holding the Bottom Line on Preventing Systemic Financial Risks,Zhou Xiaochuan, Governor of the People's Bank of China, made clear that strengthened supervision would be the key policy objective. Future goals would include deleveraging in the real economy and the financial sector as well as doing away with the old practice of unquestioningly paying off debts of state-owned enterprises. Standardizing Internet finance, strengthening local accountability for debts and anticorruption measures in the financial sector are likely to be adopted together. On the other hand, in 2017,the Chinese government announced that it would promote financial liberalization and substantially relax restrictions on foreign investment in the financial sector. This clearly demonstrated that the new leadership installed at the 19th National Congress of the Communist Party had different ideas about the reform and opening up program.It is also expected that there will be more detailed rules on financial liberalization in 2018.

Financial reform will be promoted at a relatively swift pace.