China - Economic forecast summary (June 2016)


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Economic growth is set to edge down further, from 6.5% in 2016 to 6.2% by 2017. Large-scale infrastructure spending will only partly make up for slowing business investment as overcapacity is being worked off in several industries. Real estate investment is bottoming out, but housing inventories remain sizeable. Consumption is projected to stay buoyant. The reduction in excess capacity will ease the downward pressure on producer prices, but consumer price inflation will remain low.

Monetary policy is assumed to ease to reduce financing costs and to provide adequate liquidity. Market forces should be allowed to drive the pricing of credit risk by removing implicit guarantees and ending bailouts. Corporations need to deleverage as slowing growth heightens credit risks. Fiscal policy is being eased significantly, potentially crowding out of private investment and building up imbalances. Spending should be targeted at areas that promote long-term inclusive growth, such as ensuring equal access to public services and extending the social safety net.

Productivity gains are becoming the main engine of improvements in living standards as capital-deepening-led growth has run its course. This calls for fostering innovation and entrepreneurship. Lower barriers to entry have spurred entrepreneurial activity, but the exit mechanism for unviable firms should also be streamlined. Policy emphasis is shifting towards supply-side reforms that seek to ensure sustainable development. Reallocation of labour from agriculture to industry and services has been a major driver of inclusive productivity growth and is likely to continue in the future.

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