(Yicai Global) Dec. 8 -- After the rapid fall in the central parity of the yuan against the US dollar in November, economists cut the yuan-dollar exchange rate forecast to CNY6.92 for the year end from CNY6.82 last month.
Economists believe that the yuan-dollar exchange rate is not likely to see as sharp a decline as last month, but it is equally difficult for it to rebound.
In this survey, economists for the first time gave their own views on the central parity of the yuan-dollar exchange rate by the end of 2017. More than 80 percent of them believed that by the end of 2017, the exchange rate will break the threshold of CNY7, with an average forecast of CNY7.15.
More than three percent of the depreciation is expected to exceed the spread of risk-free assets of the two countries, which means that the pressure of the yuan's devaluation still exists.
China's Gross Domestic Product kept growing at a rate of 6.7 percent in the first three quarters of this year. Economists expect growth in the fourth quarter to keep the same level and China's annual economic growth will also be set there.
Although the economic growth rate has stayed mostly flat, economists are becoming more optimistic about the short-term future. Economists polled for the index forecast this month are optimistic about China's economy in the coming month, with forecasts either higher than 50, or at 50.
Confidence Index -- Rebounded for five consecutive months
The Yicai Global Chief Economists Confidence Index for December is 50.58, the second highest value after May this year. The index reflects the expectations on the economy for the next month.
Among the economists, Qiu Xiaohua from Minsheng Securities gave the most optimistic estimate of 51.5, while Xu Hongcai from China Center for International Economic Exchanges showed the lowest at 50.
Jiang Chao from Haitong Securities believes that the current round of short-term economic stabilization is mainly reflected in the inventory cycle but stocks have rebounded in the downstream real estate, passenger-car, home appliance and upstream coal sector.
This means that inventory reduction is essentially over. If real estate sales and power generation growth rate continues to decline, in the future any inventory increase may be implemented passively rather than actively, indicating the inventory cycle is nearing completion.
Although recent food and industrial product prices peaked and fell, both the Producer Price Index and the Consumer Price Index are tending to rise, due to the overall increase in commodity prices remaining high in November.
Recently, the yuan-dollar exchange rate fell below CNY6.9, meaning capital continues to flow out. Investment by China's central bank was broadly flat, with net investment decreasing significantly over the previous week, showing a tight balance of liquidity.
The rebound of inflation and high house prices restricted a loose monetary policy, while the rise of monetary interest rate meant a tight monetary policy in the short term.
Gross Domestic Product: A slight drop in third quarter
China's GDP grew at a rate of 6.7 percent in the first three quarters of the year. Economists expect the growth in the fourth quarter to keep the same level. Ding Shuang from Standard Chartered Bank gave the highest expectation of 6.9 percent, while Zhu Baoliang from State Information Center gave the lowest at 6.5 percent.
At the same time, economists adjusted their expectations on the GDP growth this year. The 2016 annual GDP growth forecast average rose to 6.70 percent from 6.68 percent at the end of the third quarter.
Economists gave very consistent expectations of 6.7 percent on this year's annual GDP growth, barring the 6.8 percent given by Ding Shuang from Standard Chartered Bank. They expected the economic growth target of 6.5 to 7 percent for the year, can be achieved.
The growth momentum of new technologies, new products and new business will continue to grow rapidly, however its share in the economy is still less than 20 percent, making it difficult to replace traditional industries such as the real estate and automobile industries, Zhu Baoliang from the State Information Center said.
Economic growth will see an inertia decline to about 6.3 percent. In the future, the government should increase the fiscal deficit and issuance of national debt appropriately, and maintain a moderate increase in liquidity and total social financing.
To move a step forward in supply-side structural reform, efforts shall be made to guard against financial risks and strengthen the construction of the macro-prudential financial management system.
Contingency plans against risks in real estate, the foreign exchange, debt markets and financial institution withdrawal mechanisms should also be improved. Banks should be supported in writing off bad loans and implementing debt to equity swaps.
Commodity prices – Consumer Price Index picks up slightly and Producer Price Index continues to grow
The annual growth rates of CPI and PPI in November will be released this week. Economists predict the average rate of CPI as 2.18 percent, a slight rise from the October figure of 2.1 percent quoted by the statistics bureau.
Of the 24 economists participating in the survey, Pan Xiangdong from China Galaxy Securities gave the maximum forecast value of 2.4 percent, while Liu Haiying from Haiying Shanghai Investment Counseling Co. offered the smallest value of 1.9 percent.
The average yearly PPI growth rate in November is predicted as 2.2 percent, which marks a continuous uptrend since the figure turned positive for the first time this year in September at 0.1 percent.
The November figure will continue to rise compared with the value of 1.2 percent in the previous month. The highest value of 3.1 percent came from Ding Shuang at Standard Chartered Bank and the minimum value, 0.7 percent, was given by Liu Haiying from Haiying Investment.
Xu Hongcai believes that commodity prices are kept relatively stable. The yearly growth rate of CPI last month was predicted to be 2.0 percent and that of PPI to be 1.6 percent, which resulted from the recovery of bulk commodity prices and improvement of industrial yield benefits.
The increase in coal and steel prices posed some interference to the progress of capacity reduction. Government departments encouraged coal enterprises to increase their capacity accordingly to prevent prices from rising too rapidly.
The continuous growth of PPI this year indicates the government's intensified macro-regulation enables the elimination of businesses with poor performance and some improvement in the overall profitability of industrial enterprises, Xu Sitao of Deloitte China said. However, he does not believe such a growth trend can last and that the economic growth rate of China is still being lowered.
Total retail sales of consumer goods maintain stable
Total retail sales of consumer goods in November were predicted to grow by 10.06 percent on the average, keeping stable compared with the previous month at 10 percent. Of all predictions, the maximum value of 10.4 percent was offered by Ding Shuang from Standard Chartered Bank and the minimum one of 9.7 percent was given by Wang Han at Industrial Securities.
The high frequency data showed that the growth in the prices of crude oil last month declined slightly, suggesting a possible slowdown of retail sales of oil products, Lu Zhengwei of Industrial Bank Co. said.
the sales growth of automobiles last month recovered, which is likely to push high retail sales growth of automobiles last month, data from the China Passenger Car Association showed.
The growth in retail sales of consumer goods is likely to pick up from last month.
Industrial added value drops slightly from October
Survey results show that the industrial added value last month was predicted to grow by an average of 6.04 percent from the same period last year, a drop of 0.06 percentage points from October.
The statistics bureau figure of 6.1 percent, showed a slight decline. Jiang Chao from Haitong Securities Co. gave the smallest value at 5.7 percent, while Ding Shuang from Standard Chartered Bank and Zhou Hao from Commerzbank offered the largest values of 6.3 percent.
Looking at high frequency data, the industrial figures for November were not robust. The power consumption of the six major power generation groups grew by 8.7 percent from last year, falling by 4.4 percentage points from last month, Dr. Zhong Zhengsheng, the macroeconomic director of CEBM, the research arm of Caixin said.
The coal prices picked up rapidly last month, which affected the profits of steel companies, and the operating rate of blast furnaces saw a decline for the second straight month.
Driven by products of upstream industries, the Nanhua Industrial Products Index continued to rise with fluctuations.
The growth rate also dropped from last month. Dr. Zhong thought the industrial added value for November would be stable and the annual growth rate was forecast to be 6.1 percent, keeping stable compared with the previous month.
Growth rate of fixed assets investment is relatively stable
Averaging the predictions of the 24 economists participating in the survey, the growth rate of fixed assets investment for November was 8.28 percent, a decline of 0.02 percentage points from the October figure released by the statistics bureau, at 8.3 percent, marking a relatively stable performance.
Lian Ping from Bank of Communications and Xu Sitao from Deloitte China offered the highest value of 8.5 percent, while Pan Xiangdong from China Galaxy Securities gave the lowest value of 7.9 percent.
Investments in both manufacturing and private sectors see stabilization. Owing to the relative low growth rate of investments in real estate last year and the previous lead-lag effect of sales in this sector, the investments in real estate are expected to grow faster than last year, Li Huiyong at Shenwan Hongyuan Securities said.
The accumulated growth rate of investments in fixed assets last month is expected to be 8.3 percent, generally at the same level as October.
Investments in real estate development decline
The continuous recovery trend in the previous quarter is not found in real estate development investment. Instead, investments are on the decline. The accumulated growth rate of real estate investments last month was predicted to be 6.48 percent on average, a decline of 0.12 percentage points from October's data of 6.6 percent, as announced by the statistics bureau.
Of the economists taking the survey, Li Huiyong from Shenwan Hongyuan gave the highest figure of 7.6 percent, while Pan Xiangdong from Galaxy Securities predicted it as 5.4 percent, the lowest.
The uptrend of investments in the real estate sector cannot last for the following reasons -- sales of real estate in first- and second-tier cities are declining, while third- and fourth-tier cities will also see a decline.
Property developers may have less demand on land acquisition due to stricter regulation policies, Dr. Zhong said.
Seen from grass-roots survey results, owing to increasingly rigorous requirements on land acquisition, property developers tend to be more prudent in purchasing land. Large-scale developers purchase land strategically, while smaller developers tend to stay on the sidelines. Some developers build houses slowly, although the constructions begin as scheduled. The growth rate of real estate investments will not drop readily due to the base effect.
Foreign trade surplus drops to some extent
Economists predicted the average foreign trade surplus last month to drop to USD 45.433 billion from USD 49.056 billion in October. Their prediction will be confirmed within this week.
Export data is estimated to be minus 5.67 percent, marking a rise from the official data of minus 7.3 percent in October. The import data is estimated to be minus 1.63 percent, posting a slight decline from minus 1.4 percent in October.
The recovery of major global economies is still weakening and the risks of an anti-globalization trend are increasing, thus a rapid change can hardly be made in exports, Ding Shuang of Standard Chartered Bank said.
The import data in October dropped by 1.4 percent and the yearly growth rate of imports last month may be zero, which is primarily caused by the rise in commodity prices.
Although domestic demand is stable, global trade still lacks drivers and processing trade is growing slowly, which may further affect China's imports. Therefore, Ding predicted the trade surplus will shrink to USD46.5 billion from USD49.1 billion in October.
Incremental Loans to see certain rises compared with last month
Economists expected incremental loans to see certain rises compared with last month, up to CNY723.087 billion from October, reported as CNY651.3 billion in the official data.
From the perspective of the cumulative number, in recent years, the loans in the first 10 months would generally account for 93.7 percent of the yearly total. In view of the slower granting process of loans in the first 10 months of this year than before, if the proportion of loans in the first 11 months is assumed to be 93 percent, the incremental loan figure this year may be CNY900 billion, with the growth rate at 13.2 percent accordingly, up by 0.1 percentage points from October, Lu Zhengwei of Industrial Bank Co. said.
M2 to decline on a monthly basis
Per predictions by economists, the yearly growth rate of M2 in November would decline to 11.42 percent from 11.6 percent in October, the People's Bank of China said. Pan Xiangdong from Galaxy Securities and Zhu Haibin from J.P. Morgan gave the maximum figure of 11.7 percent, while Jiang Chao from Haitong Securities gave the minimum of 11.1 percent.
In Dr. Zhong's view, the growth rate of M2 as a comparable benchmark from October has risen slowly to 11.6 percent again, while that of M1 fell back slightly to 23.9 percent. The slowly diminishing growth rate scissoring between M1 and M2 indicates that funds failed to flow into real economies efficiently.
Last month, as the yuan saw a significant depreciation, the funds outstanding for foreign exchange may decline accordingly. In addition, the high cardinal number last year may also bring pressure on M2, thus it is predicted that the growth rate of M2 for November may fall back to 11.3 percent from the previous year.
Interest rate and Reserve Requirement Ratio
The 21 chief economists predicting the benchmark interest rates of deposits and loans had the common idea that by the end of 2016, the benchmark interest rates of deposits and loans will see no variations.
19 economists gave their predictions on the reserve requirement ratio, among which only one expected the possibility of a drop before the end of the year, while all the others expected no variations within this year.
In the face of the basic situation next year, provided the asset price is effectively controllable, next year will see a rather stable interest rate. Although the interest rate next year may be challenged by the pressure of rises, it is supposed to be milder than this year. Moreover, attention should also be paid to possible upcoming massive "black swan events" next year. Wu Ge of Huarong Securities said.
Exchange rate -- The yuan-dollar exchange rate to see continuous dives and to break CNY7 threshold next year
After the rapid fall in the central parity of the yuan-dollar exchange rate last month, economists cut the forecast to CNY6.92 for the year end from 6.82 last month. Economists believe the yuan-dollar exchange rate is not likely to see as sharp a decline as last month, but it is equally difficult to rebound.
Given the current international environment the significant depreciation and the promotion of exchange rate flexibility for the yuan will bring benefits. However, in the short-term view, decision makers will still be cautious to avoid risks. Therefore, decision makers may not substantially amend exchange rate policies but will restrict the capital flight and continue to interfere in the foreign exchange market.
Meanwhile, they may also slightly adjust the middle rate defining mechanism to reinforce control on the middle rate and properly reduce the predictability of adjustments, Wang Tao, co-director of UBS' Asian Economic Institute said.
Official Foreign Exchange Reserve -- To decline for the fifth consecutive month
The survey found that in November, the average predicted value of the official foreign exchange reserve was USD3.083684 trillion, indicating a further decline compared with PBOC's figure of USD3.1207 trillion for October.
Jiang Chao from Haitong Securities gave the maximum foreign exchange reserve figure of USD3.115 trillion, while the minimum, USD3.05 trillion was given by Wu Ge of Huarong Securities and Xu Sitao from Deloitte China.
Ding Shuang of SCB expected the official foreign exchange reserve in the end of November to decline by around USD50 billion from USD3.12 trillion in the end of October and eventually to USD3.07 trillion.
The variation in estimated foreign exchange will account for the USD20.25 billion reduction in foreign exchange reserves, mainly attributed to the depreciation in the Japanese yen against the dollar.
Last month, the continuous rise in US treasury bond yields may also cause a USD10 billion reduction in the market value of US treasury bonds held by China. Despite the valuation effects, last month, the foreign exchange reserve may be reduced by USD20 billion due to forex transactions.
Policies -- Active fiscal policies and stable monetary policies
China's economy may face new challenges both internally and externally due to external pressures growing significantly. The first challenge came after Trump surprisingly won the US presidential election, presenting China with more external uncertainty in economic development and more depreciation pressure in the yuan-dollar exchange rate.
The second challenge was posed by the real estate market. This acted as the major driver for the rebound in China's investment growth rate in 2016, but due to new regulatory policies on the property market, its future sustainability will be somewhat questionable.
The third challenge came with the unexpected decline in consumption causing a new lowest growth rate record of 8.8 percent in recent years, mainly attributed to the decline in car sales.
A fourth challenge arose with export recovery not being as satisfying as expected. In view of both internal and external new challenges, China is suggested to focus more on internal promotion and efficiently advance supply-side structural reform by making efforts in the three supply-demand relationships.
China must accelerate the reform in state-owned enterprises and meanwhile enhance and expand their business. Therefore, it is necessary to develop valuable businesses while also eliminating unnecessary ones.
This will achieve a dual advancement in state-owned enterprises and private ones, to meet the new demand in people's consumption with an upgraded real-economy supply.
More efforts in financial reforms are needed to build up a new financial system with multiple levels, more market-oriented features with wide coverage and achieve a dual development in finance and the real-economy.
Administrative procedures should be simplified and more power delegated to lower levels, to enable both the government and market to better prepare and give a decisive play to the market in resource allocation.
Active and effective fiscal policies should be employed to rationally reduce enterprises' taxes. China should continue to employ moderate monetary policies that are neither too market-oriented nor government-oriented, to prevent and resolve systemic financial risks and create a sound reform environment.
Yicai Chief Economists Monthly Report is jointly released by Yicai Media Group, owner of Yicai Global, gathering together monthly forecasts on the Chinese economy by chief economists at major commercial organizations in China.