Part 5 Monetary Policy Stance to be Adopted during the Next Stage
I. Outlook for the Chinese Economy
Lookingforward, therearemanyfavorablefactors to supportthesteadygrowthoftheChineseeconomy. Global economic performance is generally solid. In their latest projections, theInternationalMonetaryFund (IMF) and the Organization for Economic Co-operation and Development (OECD) have predictedahighergrowthratefortheglobaleconomyin 2017. Asabigdevelopingcountry, Chinastillhasa hugegrowthpotential, withmuchroomfordevelopmentintermsofnewurbanization, services, high-endmanufacturing,andconsumptionupgrading. Theeconomyremainsresilient,witha greatpotentialandfairlylargeroomforpolicymaneuvers. Inparticular, withadvancesinsupply-sidestructuralreforms, effortstostreamline government administration and to delegate powers, andaninnovation-drivendevelopmentstrategy, newgrowthdrivershave been gaining momentum, and domestic demand has remained a robust driver behind economic growth. Adjustment of the industrial structure has accelerated and progresshasbeenmadein removing excesscapacity. Industries well-adapted to consumption upgrading and emerging strategic industries have developed rapidly, and the organizational structures of industries have improved. Deleveraging has made headway, and the all-systemleveragingratiohasstabilized,albeit atahighlevel. Progress has also been made to curb the leverage of the financial system. A series of macro-economic management measures have played an important role in moderately expanding aggregate demand. Growth of money, credit, and all-system financing aggregates has been moderate, which is conducive to achieving medium- and high-level growth. Driven by multiple factors, the Chinese economy has exhibited positive signs amidst stabilization, and the performance of key economic indicators has exceeded expectations. Aggregate supply and demand have been better balanced with an improved structure. Growth of investment in manufacturing and private investment has rebounded, with relatively rapid growth of corporate profits and resident income. Employment has remained stable and the economy has been developing in a more stable, better-coordinated, and inclusive manner. ThePBC’sQuarterly SurveyofEntrepreneursandBankersduringthe second quarter of 2017revealsthatmacro-economicindicators, confidenceindicators, and otherindicatorshave continuedtorisequarteronquarter since 2016. TheSurveyofUrbanDepositorsshowsthatemploymentexpectations of householdshave remained generally stable.
Nevertheless, notwithstanding the positive changes in structural adjustments taking place in the economic and financial arenas, some chronic problems persist and structural mismatches still stand out. Theglobaleconomy remainsmiredinsubstantialadjustments. Some deeply-rooted problems are still unresolved, and theimpetusforgrowthisnot sufficientlystrong. The potential correction of the global asset bubble built up in the extremely accommodative monetary policy environment during the past few years, the rate hike and balance sheet normalization of the Fed, the potential exit from quantitative easing by the ECB and the BOJ, and the possibility of higher geopolitical risks and uncertainties have all contributed to a highly complicated and changeable international environment. Onthedomesticfront, to a large extent economic growth is driven by a rebound in external demand as a result of the global recovery. Therecentimprovementincorporate performanceis mainlydue to upstreamandmidstreamindustries,suchasthe coal, steel,andnon-ferrous metalindustries, whereas bottlenecks in some weak-link fields have yet to be broken and the aggregate leverage remains elevated. Endogenousdriversforeconomicgrowthstill need tobestrengthened and structuralproblems are still prominent. From the long-term perspective of the economic cycle and the structural adjustment and upgrading, efforts will be made to capture the characteristics of the current development stage, emphasize supply-side reforms as a main theme, and moderately expand domestic demand. Alongwithacceleratingthedevelopmentofnewgrowthdriversandupgradingtraditionalcomparativeadvantages, priorityreformitems, suchasstreamliningadministrativeprocedures, delegationofpowers, strengtheningregulationstoimproveservices, andfiscalandtaxreforms, willbedeepenedonacontinuousbasis. Thefivemajortasksofremovingexcesscapacity, reducinginventories, deleveraging, reducingcosts, andshoringupweakspots willbeearnestly implemented. Effortswillalsobemadetotackle the key problem of resolving zombie enterprises, to deepen the reformsof state-ownedenterprises, to promotethe newtypeofurbanization, to establish a long-term mechanism that promotes stable development of the real-estate market, to increaselabor-marketflexibility, to containthebuild-upofassetbubbles, andto reducemacrotaxburdens. The marketwillplaya moredecisiveroleinresourceallocations. Top-downdesignsandgrassrootsinnovationswillbecombined, and intergovernmental fiscal relationships will be improved. Newinstitutionalarrangementswillbeadoptedtoencouragelocalinitiativesforeconomic growth, reinforce property-rights protection, improve the business environment, and stabilize market expectations andpromotethehealthydevelopmentofthe non-public sector. Continued efforts will be madetosubstantially strengthenthe weaklinksso as to expandconsumptionandto develop theservicessector, toenhancethequalityandefficiencyofgrowth, toimprovetheincentivesanddisciplinarymechanismsoffinancialinstitutions, tomaintainsustainablefinancing, andtoexpandthescopeandspacefortheeffectiveallocationoffinancialresources.
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Inflationremains generally stable. Ultimately, inflation is determined by the economic fundamentals and the relative changes in supply and demand. Multiple factors are pushing up inflation, such as the sustained global recovery, the improved performance of many economies, and the upward trend in commodity prices despite some fluctuations. The domestic economic performance is turning for the better among stable growth, and the corporate sector recently made progress in reducing inventories, contributing to signs of a recovery in the price of industrial products such as steel and coal. During the second quarter of 2017, the GDP deflator remained elevated at 3.9 percent. Meanwhile, inflation in key economies remains subdued. Domestic growth faces both upward and downward pressures, and the base effect may slow down the year-on-year rise in inflation for the upcoming period. The above-mentioned factors amount to generally stable inflationary expectations. AccordingtotheUrbanDepositors’ SurveyconductedbythePBC in the second quarter of 2017, thefuturepriceexpectationindex edged down by 0.2percentagepointfromthepreviousquarter. Continued monitoringof potential uncertainties and changes in the future is warranted.
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