JPMorgan remains concerned about impact of the property market and the potential risk generated by the central bank’s tightening measures on the Chinese economy, yet expects robust growth in 2017 on the back of stabilising macro indices.
Speaking at a media conference on 6 June Jing Ulrich, vice-chairman of Asia-Pacific at JPMorgan Chase, said that despite the People’s Bank of China repeatedly avowing that it would maintain a cautious and neutral monetary policy this year, the Chinese central bank had actually tightened liquidity considerably over the past several months and adopted strict macro prudential measures.
“The current concern is whether the tightening of these financial policies could lead to certain unexpected financial risk, or bring about negative macro impacts,” said Ulrich.
The tightening of liquidity has been accompanied by easing stimulus, with the 2017 fiscal deficit rising 0.5 percentage points compared to the previous year fora modest weakening.
Real estate remains the biggest source of uncertainty
Ulrich points to China’s fraught real estate markets as the biggest uncertain factor when it comes to the country’s economic growth.
While the government’s “one city one policy” have achieved some success in cooling property prices, the effectiveness of other policies was open to question.
“The actual implementation of policies that can have a long-term impact on the real estate market, such as land supply policies and real estate tax policies, remains unclear,”said Ulrich. “At present policy[makers] and the market appear to still be playing a chess game with each other.”
The government’s efforts to deflate any property bubbles and concerns over the excessively rapid growth in real estate prices will likely remain the primary theme of the market.
While JPMorgan does not foresee any major volatility in the real estate market this year, it does note that the interaction between government policy and market expectations will be extremely important to the prospects of the property sector over the next several quarters.
Ulrich further observes that robust transaction amounts in 2016 may have “prepaid” for a significant amount of market demand, and that transaction volumes may decline over the next several years as a consequence.
GDP growth expected to tap 6.7% in 2017, reforms will help reduce corporate leverage
Despite these concerns JPMorgan expects China to enjoy full-year GDP growth of 6.7% for 2017, based on stabilising macroeconomic indicators in the first quarter.
While improving macroeconomic indicators have restored the confidence of overseas investors, the Chinese economy’s high leverage levels remain a major source of concern.
Ulrich said that leverage is primarily concentrated in enterprises, and state-owned enterprises in particular, and that the current round of supply-side reforms as well as SOE reforms would help to reduce corporate gearing.
Central bank to keep RMB stable for the remainder of 2017
JPMorgan expects the RMB exchange rate to remain stable this year, as PBOC strives to avoid any major fluctuations.
Ulrich said that recent weakening of the greenback as well as gains against the dollar in the currencies of China’s neighbours had raised expectations of RMB appreciation. Any RMB fluctuations would only be short-term, with a trend towards stability in the long-term.
While the Chinese central bank recently made adjustments to its RMB pricing model with the introduction of counter-cyclical factors, Ulrich said that they have not changed JPMorgan’s RMB forecasts.
Heavier regulation won’t stymie foreign acquisitions
While foreign acquisitions by Chinese companies reached a historic high last year, levels have dropped since the start of 2017 after the authorities stepped up regulation of transactions.
Ulrich said that the overall scope of foreign acquisitions won’t suffer markedly from the impact of heavier regulation this year, however, and that Chinese buyers will continue to search abroad for alluring investment opportunities.
Despite dialling up regulatory scrutiny, the Chinese government will continue to support investment in strategic areas such as the tech industry, infrastructure, consumer brands and entertainment, with Ulrich expecting the scale of foreign acquisitions to potentially exceed last year’s record-breaking level.