China set for slower growth, tighter policy in 2017 as government targets asset bubbles www.reuters.com

China's economic growth is expected to cool in 2017 as its top leaders flag tighter monetary policy and further curbs to clamp down on asset price bubbles, especially in the property market, even as a sharp drop in the yuan has fed fears of markets turmoil.

The Chinese Academy of Social Sciences (CASS) on Monday forecast China's economic growth will slow again next year to 6.5 percent, which would be the slowest pace in more than 25 years, down from expected growth of around 6.7 percent for this year.

The anticipated slowdown in the world's second-biggest economy comes at a time of heightened anxiety about the yuan, which slid to over eight year lows last month on speculation of capital outflows in the wake of Donald Trump's U.S. election victory.

On top of that, a rapid rise in bank lending, a dangerous build-up of debt in the corporate sector and a property market that has failed to fully flush out speculators are threatening to derail the economy.

That probably explains why China's top leaders, who held a key meeting on the economy last week, chose to stick to a "prudent and neutral" monetary policy in 2017, while vowing to keep the economy on a path of stable and healthy growth.

Indeed, an adviser to the People's Bank of China (PBOC) said on Monday that the tone set by China's top leaders for 2017 means the current monetary policy can be tightened.

Sheng Songcheng said there would be no grounds for easing next year considering risks from exchange rate volatility, rising inflation, the stock market and the property market.

Data earlier on Monday showed growth in China's home prices slowed again in November, suggesting that government curbs were starting to pay off, although it was too early to say if the slower trend will persist given a supply shortage in some of the bigger cities.

Analysts expect Beijing will start to remove some of the policy accommodation.

"We believe there will be some change from the current relatively loose monetary policies (to a more neutral stance), and the change will start to show up from the third quarter next year," said Wang Jianhui, an economist with Capital Securities in Beijing.

Wang cites potential risks from capacity reduction efforts including an increase in bad loans and a rise in unemployment. He expects the industrial capacity reduction campaign will expand from coal and steel currently to more industries including cement.

RECORD HOME PRICES, INCREASING RISKS

Policymakers also said China will control property bubbles and strictly limit credit flowing into speculative buying as property prices have risen at record rates this year.

Data on Monday showed new home prices rose 0.6 percent month-on-month in the nation's 70 major cities, slowing from October's 1.1 percent. But year-on-year price growth was at a record 12.6 percent, highlighting why regulators are keen to keep up the pressure on the sector lest it topples over and knocks the economy.

Analysts are already expecting the property sector - a major contributor to the economy - to be a drag on growth next year. The challenge for policymakers will be in ensuring home ownership remains attractive even as they put in place curbs to temper a speculative rally.

WEAKER YUAN

A key challenge will be stemming capital outflows amid a depreciating yuan, which has fallen almost 7 percent against the dollar this year.

The yuan will depreciate against the dollar by another 3 percent to 5 percent in 2017, Ministry of Commerce researcher Jin Bosong said on Monday at a press briefing.

In yuan terms, China's exports should grow 4 percent to 6 percent in 2017, with imports up 2 percent to 4 percent, Jin said.

China's yuan firmed against the dollar on Monday after the central bank set a much stronger midpoint than the market had expected.

China's benchmark CSI 300 Index has fallen 6.6 percent since hitting an 11-month higher on December 1 as liquidity tightens and markets begin to price in a more conservative monetary policy in 2017.

The policy signal from the economic planning meeting "disillusioned investors who had envisioned a further loosening in monetary policies. Now it's clear that policies tend to tighten," Changjiang Securities said in its latest strategy report.

Meanwhile, China's bond market weakness persisted on Monday, deepening concerns over liquidity stress toward the year-end. The price of China's 10-year treasury futures for March delivery CFTH7 tumbled more than 1 percent soon after open, although it trimmed some of the losses by midday.

"Expectations for GDP growth have fallen to 6.5 percent, but if growth is slower than that, I think anything above 6.3 percent can be considered stable," said Capital Securities' Wang.

"The main focus of policymakers is on controlling risk, not growth targets."

(Reporting by Yawen Chen and Elias Glenn; Editing by Shri Navaratnam)

Mongolia Year in Review 2016 www.oxfordbusinessgroup.com

Slower economic growth and rising debt levels were the main themes of the past year, though Mongolia’s new government is acting to restore foreign investor confidence while seeking to curb the country’s growing budget deficit.

New government

Swept into office in general elections held at the end of June, winning 65 of the 76 parliamentary seats, the Mongolian People’s Party (MPP) has had to contend with a shortfall in revenue due to lower returns from the mining industry at a time when state expenditure has risen sharply.

The country’s year-end budget deficit is expected to reach nearly 20% of GDP, ratings agency Moody’s said in November, a situation that could worsen over the next two years with extensive debts due to be repaid or rolled over.

Another challenge the new administration has faced is a steep decline in foreign direct investment (FDI), stemming in part from a sharp fall in commodity demand and prices, but also from concerns over policy shifts implemented by the former Democratic Party (DP) government.

At least some of these concerns were allayed ahead of the June election, with the DP government reaching an agreement on profit sharing and taxation with mining giant Rio Tinto over the Oyu Tolgoi mine. As a result, in May Rio Tinto announced it would push ahead with the second stage of the mine, with the development valued at $5.3bn.

Addressing investment hurdles in the mining industry, along with the MPP government’s commitment to streamlining FDI procedures, should go some way to boosting capital inflows and underpin a measured recovery in the commodities sector in coming years.

Ratings roll back

In mid-November Moody’s downgraded Mongolia’s government long-term issuer and senior unsecured ratings from “B3” to “Caa1”, with a stable outlook.

Citing a decline in key fiscal metrics, which the ratings agency said it did not see materially reversing over the next few years, Moody’s cautioned that the government faced a number of fiscal challenges and liquidity risks.

“While we recognise that the authorities have made progress in recognising off-budget spending and defining transparent, short- and medium-term corrective actions, we expect that Mongolia's debt metrics will continue to deteriorate in the next two years while fiscal challenges will be compounded by a sharp slowdown in economic growth which places further pressure on the fiscal and external positions,” the Moody’s statement said.

On a more positive note, Moody’s said that GDP growth would increase – albeit only slightly – next year after shrinking 1.6% in the first nine months of 2016. Mining-related FDI is also set to recover, leading to a pick-up in growth, as the second stage of the Oyu Tolgoi mine project comes on-line in 2018, the ratings agency said in its November note.

IMF assistance

At the end of September, the new MPP government reached out to the IMF, seeking to open negotiations towards obtaining fiscal assistance to bridge budgetary and debt repayment gaps and improve liquidity in the domestic economy.

The IMF issued a statement in November saying that talks with the Mongolian government had been productive, with discussions covering policies that could become part of an economic and financial programme backed by the fund. Meanwhile, Mongolian officials announced they hoped a comprehensive support programme with the IMF could be finalised and in place by February.

The government has also said it would welcome loan assistance from Japan as it seeks to balance austerity measures with economic development and reignite FDI, which dwindled to just $200m last year, roughly 5% of the peak capital inflow posted in 2011.

Mongolia’s debt repayment programme and import costs have been impacted by a sharp decline in the tugrik, which fell to a record low of MNT2411:$1 in November. The currency declined 17% this year, with its retreat prompting the central bank to push up its benchmark interest rates by 4.5 percentage points to 15% to support the ailing currency.

Measured austerity

The MPP government has already moved to put in place measures likely to be met with IMF approval, including cutting state spending, consolidating budgetary expenditure and conducting studies to determine the exact level of debt owed to the private sector, including foreign companies, according to international press reports.

As a first step, in mid-October Prime Minister Jargaltulga Erdenebat announced that his government aimed to halve the budget deficit to 9% by the end of next year.

The government forecasts it will be able to bring down a balanced budget by 2020, though this may depend on revenue increases, which in turn will rely on improved commodity prices as well as austerity measures the IMF may call for under the terms of a potential agreement in the new year.

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