China's Economic Growth Is on Track but Trade Frictions Pose Risks, PBOC Head Says
Zhang Yushuo
/SOURCE : Yicai
China's Economic Growth Is on Track but Trade Frictions Pose Risks, PBOC Head Says

(Yicai Global) Oct. 15 -- China's economic growth is likely to meet or beat its 6.5 percent target this year but trade frictions with the United States could prove problematic, according to the governor of China's central bank.

Business profits are rising and salaries and tax revenue are in good shape, Yi Gang said in a speech at ministerial meeting of the International Monetary and Financial Committee, which was posted online by the People's Bank of China. Price levels are also in a good range, with the consumer and producer price indexes at 2 percent and 4 percent, he said, but noting that they are expected to record year-on-year growth of just over 2 percent and between 3 and 4 percent this year.

Trade frictions also pose a risk to the economy, Yi added, saying he agrees with an International Monetary Fund forecast which suggests tensions between China and the United States could have a negative impact on economies around the globe.

The effects on China, whose exports are made up mostly by foreign-funded and privately-run businesses, could be profound and there are a number of areas that need to be factored in when considering the trade deficit between China and the US, Yi said.

These include the trade surplus in services to China, which currently stands at more than USD40 billion and has been growing at an average rate of 20 percent a year over the past few decades. The US also has a surplus in the education sector, with many Chinese students paying high tuition fees and living expenses in the States, Yi continued.

The sale of American companies in China, which totaled USD220 billion in 2015, is also a figure often left out of China-US trade statistics, Yi said, adding that many of these firms have high sales volumes. There is also the protection of intellectual property, for which China stumped up USD29 billion around the globe last year with a large portion going to the US, he added.

In order to tackle these issues, the government plans to speed up domestic reforms and China's opening up, enhance the protection of intellectual property and level out the playing field between state-owned and private companies, Yi continued. The service industry, in particular the financial sector, will be at the forefront of the country's opening up.

Domestic Drivers

The Chinese economy is also becoming more driven by domestic consumption, Yi said, adding that the surplus in the country's balance of payments continues to narrow. China's current account has long been in a surplus, which peaked at 10 percent of gross domestic product in 2007, but is dropping year by year, he added.

It booked a deficit in the first half of 2018 but is likely to record a surplus of about 1 percent of GDP for the whole year with consumption and the service sector being the key drivers, according to Yi's predictions.

China has continued to pursue a prudent and neutral monetary policy this year and there are ample policy instruments available in its toolkit, Yi said. The 10-year treasury bond yield has fallen to 3.6 percent from 4 percent at the start of the year, the seven-day reverse repurchase rate has dropped and the central bank has lowered the reserve requirement ratio four times this year, he added.

Broad money, or M2, growth is now around 8 percent, which is mostly in line with nominal GDP growth, Yi continued, saying the rise of aggregate financing to the real economy is also at a reasonable level of around 10 percent and that there are no monetary easing problems.

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Keywords: Trade , Monetary Policy , ECONOMIC GROWTH , Pboc , Yi Gang