The global economic outlook and key risks
Monetary policy normalization in the major economies will pose challenges to the global economy and to the financial markets. Although the global economy is recovering, the deep-rooted impact of the global financial crisis has not been fully mitigated. Given the stubbornly high debt levels in many countries, it remains questionable whether the recovery will continue after the monetary policy stance is reversed. Downside risks should not be ignored. While the current financial market valuation is high and market volatility is low, the probability of financial market adjustments will increase if the pace of monetary policy normalization is too rapid, which will have a certain impact on financial stability as interest rates may rise and asset prices may drop sharply. In addition, the emerging market economies will probably once again suffer from negative spillovers.
Uncertainties remain over medium and long-term consumption and investment growth. The leverage ratio of the non-financial sector is still on the rise throughout the world. If interest rates rise due to monetary policy tightening, debt-servicing pressures on the household sector may grow, which will dampen consumption expenditures. In recent years, the labor share of income has declined in both theadvanced and the emerging market economies. The persistently low income of middle- and low-skilled labor has led to growing income disparities, which may further undermine the role of consumption in driving an economic recovery. Given slower gains in productivity, an aging population, higher political uncertainties,and heavily-indebted enterprises, the prospects for global investments are by no means rosy.
Risks from de-globalization and protectionism in trade and investment still need to be closely monitored. Once escalated, protectionism will slow down or even reverse global policy coordination and economic globalization, undermine trade liberalization, and obstruct labor and capital flows. It may also result in unsustainable policies, weigh on global productivity and economic growth, and aggravate financial market turbulence.
In addition, rising geopolitical tensions and political uncertainties will also have major implications for the global economy and financial markets.
II. Macro-economic Developments in China
During the first half of 2017, the Chinese economy witnessed sound performance, with in-depth promotion of supply-side structural reforms, acceleration of upgrading and transformation of the growth model, and improved stability, equilibrium, and sustainability of economic development. Consumption demand contributed significantly to economic growth, investment growth remained stable, and exports and imports grew rapidly. Industrial production accelerated, with tertiary industry accounting for 54.1 percent of GDP, 14 percentage points higher than that of secondary industry. Employment improved slightly and consumer prices rose moderately. During the first half of 2017, total GDP registered RMB 38.15 trillion, up by 6.9 percent year on year and up by 1.7 percent quarter on quarter in comparable terms. The CPI gained 1.4 percent year on year and the trade surplus stood at RMB 1.2782 trillion.
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Consumption grew soundly, investment growth remained stable, and imports and exports expanded rapidly
The income of rural and urban residents grew rapidly and consumption expanded soundly. During the first half of 2017, the per capita disposable income of urban residents registered RMB 12,932, up by 8.8 percent and 7.3 percent year on year in nominal terms and real terms respectively. Among this, the per capita disposable income of urban residents registered RMB 18,332, up by 8.1 percent in nominal terms and up by 6.5 percent in real terms year on year. The per capita disposable income of rural residents registered RMB 6,562, up by 8.5 percent in nominal terms and up by 7.4 percent in real terms year on year. Consumption demand remained an important driving force behindeconomic growth, and final consumption contributed 63.4 percent to GDP growth. According to the Q2Urban Depositors’ Survey conducted by the People’s Bank of China, consumer willingness to consume continued to edge up and the share of residents inclined to consume posted 25.4 percent, 1.7 percentage points and 4.2 percentage points higher than those in Q1 and in the second quarter of 2016 respectively. During the first half of 2017, retail sales rose 10.4 percent year on year to RMB 17.24 trillion, 0.4 percentage point higher than those in Q1. Rural retail sales expanded more rapidly than those in the urban areas. During the first half of 2017, rural retail sales went up by 12.3 percent year on year, which was 2.2 percentage points higher than those in the urban areas. Sales of goods for consumption upgrading, such as cultural products,office supplies, cosmetics, communications equipment, automobiles, and so forth, accelerated rapidly. Online sales grew vigorously and real-world retail started to pick up. During the first half of 2017, online sales posted RMB 3.11 trillion, an increase of 33.4 percent year on year. Sales in shops and department stores monitored by the Department of Commerce gained 5.6 percent and 1.3 percent respectively, 3.6 percentage points and 0.7 percentage point higher than those in the first half of 2016 respectively.
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Fixed-asset investments remained stable, and manufacturing and private-investment growth continued to pick up. During the first half of 2017, fixed-asset investments (excluding thoseby rural residents) reached RMB 28.06 trillion, up by 8.6 percent year on year in nominal terms, which was the same as the average growth from January to May. There are several features of current fixed-asset investments. First, manufacturing investment and private investment expanded. During the first half of 2017, private investment expanded by 7.2 percent, 4.4 percent higher than that in the same period of 2016; growth of manufacturing investment registered 5.5 percent, rising for the second consecutive month. Second, infrastructure investment increased substantially. During the first half of 2017, infrastructure investment (not including electricity, heat, gas, and water production and supply) increased by 21.1 percent year on year, contributing 46.5 percent to the total investment growth and driving up investment growth by 4 percentage points. Third, the contraction of investment in Northeast China narrowed and investment growth in the other regions was generally stable.
Imports and exports grew rapidly andthe foreign trade structure improved. In RMB terms, total imports and exports during the first half of 2017 reached RMB 13.14 trillion, up by 19.6 percent year on year. Exports gained 15.0 percent year on year to reach RMB 7.21 trillion, and imports gained 25.7 percent year on year to reach RMB 5.93 trillion, resulting in a trade surplus of RMB 1.28trillion, 17.7 percent narrower year on year. In US dollar terms, imports and exports during the first half of 2017 rose by 13 percent year on year to USD 1.91trillion. Exports and imports to traditional markets picked up and trade with some Belt and Road countries increased. In terms of firms, the private sector remained the largest exporter, accounting for 46.7 percent of the total, 1.1 percentage points higher than that in the first half of 2016. From the perspective of trade, the share of general trade rose by 0.4 percentage point year on year to 56.7 percent of the total. The trade structure improved slightly. In terms of products, machinery and electronic products and traditional labor-intensive products remain the major export products, accounting for 57.2 percent and 20.5 percent of the total exports respectively. Imports of commodities, including iron ore, crude oil, and natural gas continued to grow in terms of both quantity and price.
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Foreign direct investments (FDI) continued to focus on high-end industries, and the drop in outbound investments narrowed. In the first half of 2017, actually utilized FDI was stable, with a decline of 0.1 percent year on year to RMB 441.54 billion. In terms of industries, during the first half of 2017, FDI in the service industry reached RMB 309.99 billion, accounting for 70.2 percent of the total. FDI in the high-tech service industry gained 11.1 percent to reach RMB 34.97 billion. FDI in the manufacturing industry increased by 3 percent year on year to reach RMB 128.6 billion, accounting for 29.1 percent of the total. During the first half of 2017, outbound non-financial direct investments by domestic investors registered USD 48.19billion, down by 45.8 percent year on year. Outbound investments in June gained 65.5 percent month on month, achieving positive growth for two consecutive months. In the first half of 2017, direct investments to the Belt and Road countries reached USD 6.61 billion, accounting for 13.7 percent of the total, up by 6.0 percentage points year on year and indicating that investment cooperation is advancing soundly. The sectoral structure of outbound investments improved further. During the first half of 2017, outbound investments mainly focused on leasing/commercial services, manufacturing, wholesale and retail, and the information transfers/software/information technology service industries, accounting for 28.3, 18.3, 12.7, and 11.4 percent of the total respectively.
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