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China seen staying the course on monetary policy: survey

Yuan rate expected to remain largely flat for the rest of 2017, local economists say

New apartment towers go up in Guangdong Province. Regional restrictions on home purchases have cast a shadow on property sales across China.

HONG KONG -- With Chinese President Xi Jinping kicking off his second term at the Communist Party congress starting Oct. 18, economists expect the authorities to take few if any steps to tighten monetary policy so as not to rattle the economy.

Most respondents to a recent survey by Nikkei Inc. and Nikkei Quick News do not foresee a major shift in economic policies following the congress, although many think that the Chinese leader will impose some additional financial regulations, such as on shadow banking.

"Policy priority is still delivering growth rather than ensuring future financial stability," Bank of Singapore chief economist Richard Jerram said.

But a few predict more radical change. "We think with more consolidated power after the 19th [party congress], President Xi will kick off more real but painful reforms," said Shen Jianguang, chief China economist at Mizuho Securities Asia.

Many also expect the People's Bank of China to keep interest rates and the reserve requirement ratio steady over the next year.

When respondents were asked to rate China's supply-side reforms on a scale of 1 to 10, the average answer came to 6. Kenny Wen, a wealth management strategist at Sun Hung Kai Financial, argued that government measures have lifted resource prices and corporate profits while also having a positive effect on consumer spending and investment.

Others are less convinced. "The costs and benefits likely offset each other," said Bank of China (Hong Kong) senior economist Ricky Choi.

Growth outlook

The average estimate of year-on-year real GDP growth came to 6.7% for the July-September period, down slightly from the previous two quarters. The full-year forecast of 6.8% beat the government projection of around 6.5%.

Economic growth peaked in the first half, according to ABN Amro Bank senior economist Arjen van Dijkhuizen. "There is less need for the government to add support by, for instance, raising infrastructure spending," he said, projecting slower growth.

So far, "the slowdown has been mainly policy-driven, including the closure of polluting production facilities and local government deleveraging," Mizuho Securities' Shen said.

Regional restrictions on home purchases and rising mortgage rates have also cast a shadow on property sales. Asked to rate out of 10 how "bubbly" China's real estate market currently is, respondents on average answered 6.1 -- a cooler outlook than the 6.6 in the previous survey three months ago.

Credit tightening and a downturn in the property market continued to rank as the top two downside risks for the Chinese economy. Geopolitical risks over North Korea, meanwhile, rose to fourth place. A large-scale conflict could deal a critical blow to the economy, according to Ken Chen, Chinese economy analyst at KGI Asia.

Pumping the brakes

Meanwhile, respondents expect the yuan to remain flat at about 6.65 to the dollar toward the end of the year. The Chinese currency has been weakening since hitting 6.43 against the greenback in early September. But Beijing does not want a major decline in the yuan's value, and the currency will likely not weaken much following the party congress, said Fan Xiaochen, head of economic research in Hong Kong for Bank of Tokyo-Mitsubishi UFJ.

With the introduction of the "countercyclical adjustment factor" in the daily fixing mechanism for the dollar-yuan rate, the PBOC "now plays a more active role" in guiding the home currency, said Raymond Yeung, chief economist for greater China at ANZ Bank.

And with the settling of the yuan rate, China has lifted some restrictions on capital outflows, but few expect a further relaxation this year. Sun Hung Kai's Wen said the Chinese government is more concerned about financial stability than turning the yuan into a global currency.

The yuan will continue to weaken over the medium term, according to China Merchants Securities' Xie Yaxuan.

Regarding U.S. President Donald Trump's planned trip to China in November, some expect progress on trade disputes, particularly in the financial and agricultural sectors. However, "Trump will come away thinking he has made a good deal, but in reality nothing will change," Bank of Singapore's Jerram said.

Economists responding to this survey:

Ken Chen, Chinese economy analyst, KGI Asia; Ricky Choi, senior economist, economic research division, Bank of China (Hong Kong); Mo Ji, chief economist, Asia ex Japan, Amundi Asset Management; Yao Wei, China economist, SG CIB; Liao Qun, chief economist and general manager of research department China, CITIC Bank International; Shuang Ding, head of greater China economic research, Standard Chartered Bank (HK); Richard Jerram, chief economist, Bank of Singapore; Chris Leung, senior economist, group research, DBS Bank (Hong Kong); Kevin Lai, Daiwa Capital Markets; Li-Gang Liu, chief China economist, Citigroup Global Markets Asia; Zhu Haibin, chief China economist, J.P. Morgan; Frederic Neumann, co-head of Asian economics research, HSBC; Robin Xing, chief China economist, Morgan Stanley; Raymond Yeung, chief economist, greater China, ANZ Bank; Kenny Wen, wealth management strategist, Sun Hung Kai Financial; Yu Song, chief China economist, Goldman Sachs; Shen Jianguang, chief China economist, Mizuho Securities Asia; Yang Zhao, chief China economist, Nomura; Thomas Shik, acting chief economist, economic research, global markets, Hang Seng Bank; Fan Xiaochen, head of economic research, economic research office (Hong Kong), Bank of Tokyo-Mitsubishi UFJ; Arjen van Dijkhuizen , senior economist, ABN Amro Bank; Susan Joho, economist, Julius Baer; Xie Yaxuan, China Merchants Securities; Peter So, managing director and co-head of research, CCB International Securities.

Nikkei staff writer Zheng Zhi in Hong Kong contributed to this story.

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