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  Views from Bank of Communications: China on Highquality Economic Development Journey

On January 4, the Bank of Communications (BOCOM) published the Report on 2018 China’s Macroeconomic and Financial Prospect (hereinafter referred to as the Report) in Beijing. Dozens of authoritative media such as Xinhua News Agency, People’s Daily, China Central Television, Central People’s Broadcasting Station, Economic Daily, Economic Information Daily, Financial Times, China Securities Journal, Shanghai Securities News, Securities Daily, China Business News, Ta Kung Pao, Sina and Caijing website participated in the conference and reported relevant contents.
At the conference, Professor Lian Ping, the Chief Economist of BOCOM, conducted a deep exchange and discussion with members of media with regard to the contents of the Report and the current economic and financial hotspot issues. Hong Hao, the Managing Director of BOCOM (international) & the Head of Research, and Jiang Qin, the Senior Analyst of BOCOM Financial Market Business Center expressed their views on China’s stock market and bond market respectively. Ph.D. Zhou Kunping, the Vice General Manager of Financial Research Center & the Chief Researcher hosted this reporting conference.
The Report predicted the growth of global economy and major economic entities by confirming that the global economic recovery is accelerating, while uncertainties still exist. Since the second half of 2016, the economic growth of major economic entities has speeded up with an expectation that this recovery trend will continue in 2018. It is estimated that in 2017 the global economic growth rose up to 3.4% and the growth is expected to rise to around 3.7% in 2018, faster than that of 2017. The U.S. economy has remained a continuous improvement in general. It is estimated that American economic growth in 2017 was at 2.3% and it is expected to further increase to around 2.7%. The European countries have experienced a gradual improvement in their economies, but still are faced with many tests. It is estimated that in 2017 the EU economic growth recorded at 2.1% and in 2018 it is expected to accelerate to 2.3%. As the domestic demand for Japan’s economic growth is insufficient, the economic recovery trend is possibly hard to maintain. It is estimated that Japan’s economic growth in 2017 was at 1.5% and it is expected a slowdown to 1.4%. The emerging countries as a whole have seen a rapid economic growth with an estimated economic growth of 4.3% in 2017 and expectedly expedited growth of 4.6% in 2018.

The Report analyzed the current situation of China’s economic development by pointing out that China’s economy has grown steadily with accelerated quality uplifting. This is mainly manifested as follows: 1. The economic volatility has been reduced significantly. From 2015 to 2017, the quarterly growth volatility remained at 0.1 percentage point—a stability which was brought by replacing old growth drivers with new ones and increased resilience is expected to be maintained in 2018. 2. The three economic growth drivers, namely as export, investment and consumption, are supposed to remain picking up, slowing down and flat respectively. It is predicted that China’s 2018 export growth will reach 10%, higher than that of 2017. The growth of fixed asset investment will slow down to around 6.5% in 2018, while the consumption growth is expected at around 10%. 3. The transaction of real estate properties has gone weak, but the development and investment in real estate industry has maintained a certain level of growth. The real estate market will continue to decline in 2018 with the growth in the sold floor areas of commercial properties dropping to -10% to -5% on a year-on-year basis, while the real estate investment will not be decreased sharply, or even possibly realize an increase within 5%. 4. The CPI has risen up a little bit, while the PPI has dropped down from a high level. The overall inflation has been moderate. The 2018 CPI will rise around 2%, higher than that of 2017; the average growth of PPI in 2018 will be at around 3.5%, lower than that of 2017. The price scissors between CPI and PPI is expected to gradually narrow and commodity prices will remain relatively moderate.
In the Report, China’s economy is estimated to grow steadily with a possibly slight slowdown in growth. The growth in 2018 is expected at around 6.7%. Meanwhile, three potential risks need attention. Despite a flat economic aggregate and growth, the quality uplifting is expected to pick up. The structure of economic drivers has been transformed and the consumption has continuously outpaced investment; The growth of the tertiary industry will continue to outstrip the second industry and the service sector will see new opportunities of development; The supply-side structural reform has led to intra-industrial structure upgrading and promoted industrial concentration, which has a positive effect on efficiency resulting in a phenomenon of “the stronger are always strong”; The rapid growth of digital economy and Internet Plus have brought about development opportunities to innovated and leading technology enterprises. With regard to the three potential risks, the normalization of monetary policies in developed countries will have an adverse impact on the capital flow and currency exchange rate of emerging entities; the trade protectionism that the United States has pushed forward will have an negative influence on China’s export; The tightening pressure implemented by multiple policies will be superimposed on the financial market.

In the Report, it was pointed out that the growth of China’s monetary credit in 2018 will slow down with a stable exchange rate of capital inflow. This is mainly manifested as follows: the credit growth will decline a little bit and the structure of social financing will enter a period of adjustment. The 2018 credit growth is expected at around 12.5%-13.0% with an increase of RMB 15 trillion. The increase of social financing will be about RMB 19.5 trillion, while the fall of growth of M2 measure of money supply shows the effect of deleveraging. It is normal that the market liquidity will be periodically tightened. With a more obvious effect of “shifting from virtual economy to real economy”, the growth of social financing and credit will keep stable with little possibility of the continuously declining of M2. The market liquidity is possible to maintain the normal trend of “generally moderate with periodically tight” in 2018. The capital flow will remain net inflow and the exchange rate of RMB will be stable. China’s non-reserved financial account surplus under the balance of international payments is supposed to reach around USD 140 billion. The surplus of direct investment may be narrowed, while other investment won’t fluctuate heavily and keep a surplus. Funds outstanding for foreign exchange may be increased around RMB 50 billion. The RMB exchange rate in 2018 will keep stable within a range from 6.4 to 6.7 in the whole year, a smaller volatility than that of 2017.

First, the proactive financial policy will pay more attention on structural adjustment. In the coming three years, it is not very hard for us to accomplish the target of 6.5% average growth during the period of the 13th Five-Year Plan. As a result, the obvious effort on stabilizing the growth by pursuing more actively financial policy won’t occur in this year. We will ensure success in the three critical battles against potential risk, poverty and pollution, which are important for decisively bringing to completing the building of a moderately prosperous society in all respects. The tough work needs the continuation of expanded financial policy. Thus, a proactive financial policy is expected to be maintained in 2018. The financial deficit will remain at 3% with about RMB 2.48 trillion in amount. The key to implement a proactive financial policy is to promote the supply-side structural reform and enhance efforts to safeguard people’s livelihood. The implementation of cutting taxes and administrative fees and the reform of financial system means that the supporting efforts on increasing the investment in infrastructure may be weakened. Therefore, it is necessary in the future to strengthen the financial policy’s role in promoting economic structure transformation. To this end, we need to adopt three measures as: 1. Optimizing financial expenditure structure and increasing the efficiency in utilizing financial funds; 2. Making more efforts on structural tax reductions to relieve tax burden on real economy; 3. Providing more support to key areas of structural transformation and consumption promotion to upgrade the quality and efficiency of economic development.

Second, the steady and neutral tone of monetary policy remains unchanged and macro-prudential policy will take into account the moderate level of market liquidity. Under the framework of “Two Pillars” in 2018, the adaptability between monetary policy and macro-prudential policy will be enhanced and the monetary policy will maintain a moderate and neutral tone. Considering the role of financial deleveraging in serving the real economy is clear, the overall pressure on the pickup of interest rate in monetary market still exists. The rising loan rate has already affected the real entities’ financing cost. In the future, under the backdrop of strengthening supervision and financial deleveraging, the People’s Bank of China will take into account the overall adaptability of market liquidity. Given the current open market and structural instruments are abundant, the Reserve Policy has already conducted structural adjustment and emergency arrangement, so the need for reducing the reserve ratio is decreased. We suggest that monetary policy should maintain its adaptability of neutral with real meaning as well as its flexibility starting from the realities. We should avoid the possible multiplied effect caused by applying monetary policy, macro-prudential policy and micro-prudential supervision toward the same direction, while playing well the neutral role. We should adopt various measures at the same time to avoid the loan rate raising too fast, which results in an excessive rise of financing cost. We should pay attention to the possible liquidity risk in the process of adjusting bank’s business under the new rules of asset management, comprehensively and flexibly utilize the existing liquidity management tools and further expand these tools’ adaptable scope.

Third, the priority to establish a long-term mechanism of promoting the development of real estate industry lies at encouraging both purchasing and renting a house. The integrated policies of “Four Limits”, namely “limit on purchase, loan, price and sale” are expected to continue in 2018, while a long-term mechanism focusing both on purchasing and renting will be promoted. Therefore, we suggest big cities under more pressure from population inflow should, while increasing the land supply for building houses for renting, hold tight the land supply for building commercial houses to prevent “covert occupying” which will lead to the rise of land price as well as housing price. Local housing administration bureaus should strengthen cooperation with Internet and technology service companies to build an official transaction and service platform of house renting. Such cooperation between government and enterprise will provide evidence of house resource supply and transaction supervision. We suggest offering individual applicants some preferential policies such as renting subsidy, individual tax deduction and paying rent by using housing funds. Although the real estate tax legislation is hard to be accomplished in short time, it can be implemented differentially in batches according to different approaches. Key cities with increasingly enlarged proportion of houses in stock can take the lead to collect tax or increase the tax rate.