China’s economy can sustain its momentum through June, supported by government stimulus, infrastructure projects and housing development.

1. Capital Group Financial Advisor Tokyo Japan -
Where Is China’s Economy Headed In 2017?
Key Takeaways
China’s economy can sustain its momentum through June, supported by government
stimulus, infrastructure projects and housing development
Demand for commodities and construction equipment should be supported by credit
growth
The Chinese renminbi will likely further depreciate against the U.S. dollar amid external
pressures
The list of problems that China faces is not short. Its economy isn’t growing as fast as it
once was, monetary authorities are battling capital flight, debt is mounting and the new
U.S. president is talking tough on trade. Here is how I see things shaping up for China in
2017.
Stimulus Effects Still Feeding Through the Economy
I am more optimistic than most about the direction of the Chinese economy. The
consensus view is that China’s economy will lose momentum in the first quarter of this
year as the red-hot housing market cools and government stimulus wears off. There is
also the risk of tense trade relations with the U.S.
That said, in my view China’s economy can continue to grow along its current trajectory
in the first half of the year, which is 6.5% according to official government figures.
Here’s why: There are enough new investment projects in the pipeline to support
economic growth during the first half of 2017. Construction firms, for instance, reported
order growth of greater than 30% during the first nine months of 2016. This included a
mix of big and small projects, ranging from real estate to infrastructure manufacturing.

2. The good news is projects tend to last two to four years. And by my count, this activity
marks the greatest acceleration in new project starts since 2009. This should be
supportive for commodity prices and global mining companies through the first half of
2017.
There is a lot of skepticism out there right now about private sector capital expenditures,
too — but there are early signs cape is recovering, with real interest rates down and
some sectors showing obvious capacity shortages.
To be sure, I do expect growth to slow in the second half of this year, especially with
mortgage credit slowing and home sales having flattened.
Pockets of Strength in the Housing Market
There is a lot of bearishness about China’s housing sector.
Home sales skyrocketed in 2016, as did prices, with approximately US$1.4 trillion in
new housing sold. Worried about a property bubble, government authorities are curbing
incentives and rolling out buying restrictions as well as stricter lending requirements in
some larger markets.
This is certainly impacting activity in China’s 30 largest cities, where sales fell 20% year
on year in November. The market’s expectation now is that new housing starts will fall,
denting gross domestic product growth and demand for commodities such as iron ore,
copper and cement.
I agree that sales will slow, but not to the degree that most suspect.
Outside of the 30 largest cities, sales remain stronger due to affordability and the
absence of government purchase restrictions. Immigration into smaller cities from
surrounding rural areas will continue, pushing up the urbanization ratio from its current
55% level to nearer 70% to 80% over the next two decades. A lot of urban households
want to upgrade their apartments, too. Interest rates also remain low, which should
continue to support sales across most markets.
Furthermore, we have moved past the horror stories of ghost cities. Inventories continue
to shrink nationally and housing stock in the bigger cities is at pre-glut levels.
Inventories remain high in many smaller cities, though, so this is still a challenge.
Along those lines, new housing starts should continue to grow for the next three to six
months, I think. Historically, housing accounts for twice the commodities demand of

3. infrastructure, so I am watching this closely. While cautious, developers appear to be
building more again.