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Analysis of Economic Situation in First Quarter

February 23, 2017
Cheng Hong

In the first quarter of 2017, economic growth is facing rising uncertain risks due to the big change in international economic policies and environment, especially the new presidency of the United States. At the meantime, as the market tends to clear, new driving forces are coming into being. Since 2013, the downward economic growth has been coming to the bottom in this quarter. Specifically, the economic situation in the first quarter are analyzed as follows:


I. Will Donald Trump Bring about Black Swans?
The presidency of Donald Trump symbolizes that the U.S. people are shifting from globalization to protectionism, which be the most uncertain risks in China’s first-quarter economic growth. Trump will implement the U.S. Priority Strategy, which means to “buy products made in America and employ American workers,” so a series of policies favoring trade protectionism will be worked out. Due to this move, China may face the downturn of its over-thirty-year economic driving forces relying on globalization. European countries will follow the U.S. to take trade protectionist measures, and hereafter, global situation will be greatly changed. Chinese economy, long enjoying the most bonus of globalization, will inevitably suffer tremendous negative external influences. Therefore, a series of “black swan” events will be brought about in Chinese economy due to the presidency of Donald Trump.


II. Plutonomy of Government Successions
This year is a periodic node of local government successions. After “the Two Meetings” including National People's Congress and the Chinese Political Consultative Conference (NPC & CPPCC) were finished in all provinces and municipalities. After the new government came into power, strong political urges for economic growth has already come into being and new round of regional investment hit was ready to spurt. On the other hand, the Nineteenth National Congress of the Communist Party of China will be held in September. The Central Government favors the overall direction of economic growth as “stability-oriented”, and it is impossible for the local governments to adopt “large-scale, massive and fast” development model. Therefore, the government will have stable influence on the overall economic growth.


III. Consumer Demand Speeds up its Shifting to “Quality Improvement”
The consumer demand will also face an important change of nodes. “Quality Improvement Project” was proposed with highlights in the Central Economic Working Conference. The government has been aware that quantity-based growth model featured by low quality and price is hard to continue. From the perspective of suppliers, the government will reduce the support for the low-quality-and-capacity enterprises. With the maturity of market-and-competition-driven mechanism, uncompetitive low-quality products will withdraw from the market and the enterprises are driven to manufacture products with higher quality. For consumer demand, the demand for high-quality products will increase steadily with the rising demand of middle-income consumers. Therefore, consumer demand in the first quarter has the chance to rise from the recession.


IV. Low Overall Investment under the Austerity of Government Investment
From investment demand, low investment growth is of great possibility. In 2016, China had a national investment growth rate of 8.1%, in which the civil investment growth rate only accounted for 3.1%. It indicates that our investment growth mainly relies on the driving from the government. However, the government investment may contract due to two constraints: one is the hard constraint from the benefits of government investment project, and the other is the hard constraint from government debts. According to the data released by the government in 2016, the debt rate of local governments is 89.3%, much higher than the alert line of EU government debts at 60%. If plus debts of shadow banks, this debt rate may be higher than that. If government investment cannot sustain its increase itself, the growth in investment will be continuing low.


V. Intensified Entrepreneurial Differentiation
Entrepreneurship as the core component of economic growth will present further differentiation in the first quarter. On one hand, entrepreneurs relying on traditional survival model will withdraw from the market because of the contraction of government investment and reduction of supporting policies; on the other hand, a batch of innovation-motivated entrepreneurs are shifting their enterprise development strategy to innovation-driven, especially quality innovation-driven. Traditional entrepreneurs’ withdrawal will have negative impacts on economy, while creative entrepreneurs’ maturity will play a positive role. In sum, the economic situation will be more positive than negative, and more hopeful than hopeless. 


VI. Short-term Hedging of Exchange Rate and Labor Cost on Export
Since 2016, the RMB exchange rate against the U.S. dollars has been falling, which to some extent stimulates export increase, but its impact is less than expectation. Therefore, little expectation should be held to the adjustment of exchange rate. On one hand, during the first quarter, the RMB exchange rate against the U.S. dollars has little possibility for further depreciation, and moreover, general trades are insensitive to changes in exchange rate. The overall exchange rate tends to be stable; on the other hand, rising labor cost will throw significant impacts on export. Due to the declining of newborn workforce, enterprises are short of labor and a large number of processing trade have been transferring to Indonesia, Thailand and other Southeast Asian countries, so the processing trade will be further declining. In addition to the counter-globalization measures taken by America-led developed countries, China’s general trade will also be greatly affected.


VII. Increasingly Significant Polarization of Regional Economic Factors
During the second half of 2016, the government implemented strict control measures on the real estate market, but the real estate market was still unevenly developing. In some big cities, especially the megacities, the housing prices are still rising dramatically, but the prices in medium- and small-sized cities lacks potential to increase. It indicates that regional allocation polarization in human resources and capital tends to be increasingly significant. The convergence of factors to big cities leads to the continuous increase of rigid housing demand. As long as the government liberalizes the land use to big cities, a new round of real estate investment growth will be a great probability.


VIII. Overall Economy Appears to Be Declining to the Bottom
Above all the analysis, during the first quarter, China is facing the risk of uncertainties arising from the counter-globalization of developed countries; government investment is unlikely to increase due to the political periodic influence; export will be lingering under the downturn due to exchange rate and rising labor cost. At the meantime, new growth will appear in consumer demand owing to the “quality improvement project” influence; clearing of the entrepreneur market is being constantly accelerated and economic factors are coming into being in regional polarized agglomeration. The first quarter functions as an important turning point in China’s economic development, and new vitalities and hopes are hidden in its uncertainties. In sum, the macro-economic downturn in the first quarter is approaching to the bottom.