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Donald Trump, Debt, Real Estate: What Could Slow Down the Chinese Economy in 2017

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As the Chinese economy continues its structural slowdown, it will face significant challenges in 2017.

China’s economic slowdown

For the past 3 years, China has been experiencing a gradual drop of its GDP growth rate. According to experts, the economic slowdown is the result of the gradual slowdown in labor force growth (reinforced by the impact of the one-child policy) and the inevitable decline in productivity gains, as the economy is becoming more mature.

The credit boom and its consequences

While credit has steadily increased in recent years, much faster than the economic growth, corporate debt already reached 168% of the GDP in the third quarter of 2016, or nearly $ 18.5 trillion. With such a strong and rapid increase in credit, many unprofitable firms may find it difficult to finance in the event of tighter monetary policy in China. Credit is already getting stricter as the government decided in December to focus on risk reduction and financial stability, to the detriment of economic growth, implying measures to curb the credit. As a result, the amount of doubtful loans (loans with little chance of being repaid) may prove to be higher than what the official figures suggest. A phenomenon that could cause trouble…

The appreciation of the dollar against the yuan

Yuan weakened against US Dollar
Chinese Yuan Keeps Depreciating Against US Dollar

While the yuan (or renminbi, “currency of the people”) has already lost nearly 6% against the dollar in 2016, the upward trajectory of the US currency is a major challenge for Beijing. As China massively bought yuan currency to support its exchange rate, its foreign exchange reserves have melted by nearly $ 1 trillion, to $ 3 trillion in just two years. Beijing could also defend the yuan by implementing monetary tightening policy, but the room for maneuver of the PBOC (the country’s central bank) is limited, because of the size of the credit. The situation could be very worrying for the PBOC if the Federal Reserve (the US central bank) keep raising its exchange rate in 2017 as it has already been initiated by new Donald Trump government.

The real estate industry could slow down

One of the major pillar of China’s economic growth has been the development of the real estate sector over the past 10 years. In 2016, Chinese real estate grew strong, both in terms of construction and price increases. To cool down the overheated property market, local authorities have increased the share of minimum input required to purchase a property in order to lighten the use of mortgages. Consequently, the growth of the housing sector should slow down in the coming year.

Donald Trump threaten Chinese exports

donald trumpDonald Trump claimed during the election campaign that he would declare China a country manipulating his currency once he has become president and would impose heavy duties (up to 45%!) on US imports of Chinese goods.

In the end, China’s growth should continue to slow down in 2017 and the country will likely go through hard times in the coming months.