China’s economy will cool this year—but it’s a good thing

No longer a fun ride.
No longer a fun ride.
Image: Reuters/Kim Kyung-Hoon
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This post has been updated with China’s latest GDP figures.

China’s latest official economic growth numbers are in. For the full year, the Chinese economy grew a surprising 6.9%, up from a 26-year low in 2016, and beating the government’s target of 6.5%. For the fourth quarter, GDP expanded 6.8% compared with the same quarter a year earlier, beating a market estimate of 6.7%.

The official figure for 2017 is in line with the government’s own recent prediction. Last week, premier Li Keqiang said that the Chinese economy outperformed market expectations in 2017, thanks to the government’s efforts to better allocate resources and to refrain from overusing stimulus measures. Analysts have credited (paywall) China’s strong growth for 2017 to steady domestic demand and an improved global economy.

The real recovery could be even sharper than official figures would suggest, as the Financial Times notes (paywall), because the true extent of the previous downturn was never revealed due to economic data fraud at the provincial level. In recent weeks, several regions have admitted to fudging numbers.

But moving forward, China’s economy may become a bigger worry this year, as the government is finally expected to tame the country’s debt risks and factory pollution. Citing these two reasons, 70 analysts polled by Reuters forecast that China’s GDP growth is set to slow to 6.5% in 2018.

China’s economic growth, among the world’s fastest in recent decades, is fueled in large part by surging debt. The country’s total outstanding debt was worth an alarming 274% of its GDP in the first half of last year, more than double the ratio from 2008, according to an estimate from Deutsche Bank (pdf, page 3). Both S&P Global Ratings and Moody’s downgraded China’s long-term sovereign credit rating last year.

Chinese officials have signaled less emphasis on growth, pledging in December to shift focus to cracking down on financial risk, pollution and poverty in the coming years. The country’s strong growth for 2017 has given policymakers a perfect window to accelerate debt reduction, which is “likely to come at the cost of slower GDP growth in the near term but will improve China’s long-term economic prospects,” notes the World Bank in a December report.

“Authorities seem to have gotten more comfortable with slightly slower growth, and the central bank is tightening monetary policy,” says David Folkerts-Landau, Deutsche Bank’s chief economist, in a note published December. “We expect some policy easing in mid-2018 to support growth. But this option may be off the table if inflation is high. Growth would then slow and could weigh on global growth.”

China is tipped to set its 2018 GDP growth target at around 6.5%, unchanged from the previous year, so as to leave more room for its deleveraging campaign. The country is slated to announce its GDP target and economic plans during the Chinese parliament’s annual meeting in March.