Researchers: too soon to call PPI's growth as sign of recovery

By Wu Zheyu | chinadaily.com.cn | Updated: 2016-11-09 10:04

A cargo ship is being built at a private shipyard on the bank of the Yangtze River in Yichang, central China's Hubei province, April 13, 2015. [Photo / IC]

It's too early to say whether reforms are taking effect, even though the Producer Price Index (PPI), which gauges factory-gate prices, rose by 0.1 percent year-on-year in September after falling for more than 54 months since March 2012, warned a report issued by the Center for China in the World Economy (CCWE), Tsinghua University.

Although many research centers predict that the economy has already reached the bottom and will now rebound, CCWE said it still needs to observe how China will tackle major challenges in 2017.

CCWE is led by David Daokui Li, who served as a part of an academic trio of advisors to the Monetary Policy Committee of the People's Bank of China (PBOC), China's central bank, from 2010 to 2012.

The report, which analyzes predictions based on China's economy's third quarter (Q3) data in 2016, covers various key aspects, such as fixed-assets investment, PPI and CPI, property market, consumption, imports and exports, exchange rates and leverage.

After studying the different indicators, it concludes that more time is needed to definitively say that an economic recovery is around the corner, although numerous indicators do show that the growth is stabilizing. CCWE predicts that the GDP growth rate for the whole year in 2016 would be 6.7%, but the annual rate of growth will slow down to 6.6% for 2017.

The CCWE research team said the main engines driving the PPI's growth are the upstream industries such as mining and quarrying, which means the foundation is not solid or sustainable, and also more unpredictable.

CCWE said although PPI would gradually maintain positive growth as the prices of the coal, iron and steel industries rebound, in the long run it would be difficult to drive PPI, especially when the performance of downstream processing industries is still lackluster.

Li Keaobo, Research Fellow and Executive Secretary General of CCWE,was attending a session of conference.[Photo provided to chinadaily.com.cn]

The unsustainability also remains as a problem in several key industries. The property sector, the report analyzes, will enter a new phase of adjustment. As the National Bureau Of Statistics (NBS) Q3 data shows, the revival of the housing market contributed around 8 percent to GDP growth, which is even higher according to CCWE's estimate, and from the aspects of investment and sales, and its direct contribution to economic growth accounts for around 0.54 percentage points. While these percentages may decline or endure a period of fluctuation for one to two years due to the strengthening of the housing purchase quota policy, the cycle of adjustment that's needed under historical experiences of macroeconomic regulation and the negative influence on future consumption may pose by excessively rapid growth of newly residential housing mortgage proportion.

To be more specific, CCWE researchers give the measurement based on the economic model developed on their own. The increase in investment for the cities without purchasing quota was 5.7% for the first three quarters of 2016. However, when factoring in the 22 cities that currently have purchasing quota restrictions, the increase in investment in housing for the entire year would be below 5%.

Li Keaobo, Research Fellow and Executive Secretary General of CCWE, told China Daily website, "The downward trending of overall price of property market may last until the beginning of 2018. In the last phase, the main solution to reducing the housing stock is more dependent on consumers' increasing demand for housing, and then the next phase will be to decrease developers' investment into market to reduce the supply."

As for policy suggestions to the property market, Li said: "Necessity did exist to implement the property tax. The reform is imperative to adjust the structure of economy, while the power could be allocated to local authorities, let themselves to determine whether or how much to implement. A 'One size fits all' standard should be avoided."

Li summarized several points to explain their worry for the key drivers of China's economy in 2017: "For the consumption aspect, first, for 2016, the automobile industry contributed greatly to consumption, while stimulus policy for this industry will end by the end of this year. Second, as the mortgages of residents increased sharply in 2016, they would use disposable income to pay their loans in the next year, which would cause a 0.3 percent decline to the growth rate of consumption according to our estimate. Hence, our hope should be placed on investment, while manufacturing, which accounts the biggest share, 30 percent, of fixed investment, should still perform just in the positive. And also for the infrastructure industry, it has already sustained a relatively-high growth level for many years, and we predict it can hardly shoulder the burden of further growth in 2017."

"Deepening reform, offering more incentives to SOEs and encourage local authorities to improve efficiencies are the routes we must make." Li suggests.