China is set to meet its annual economic growth targets for 2016, but to sustain momentum policymakers must walk a fine line between stabilizing economic growth and pressing ahead with planned reforms.
Despite a troublesome start, persistent weakness in the yuan, a batch of dire economic data, signs of capital outflows reaping havoc on financial markets, and headwinds from home and abroad, the Chinese economy is ending 2016 on a firm footing.
With recent economic data almost universally topping expectations, it is widely expected China will register annual growth of 6.7 percent, within the government's target range of 6.5 to 7 percent set at the beginning of the year.
For the year ahead, analysts said policymakers will face hard choices in deciding the midpoint between growth and reform, with downward pressure, emerging risks and increasing global market uncertainty complicating the outlook.
The basic tone of "seeking progress while maintaining stability" will be an important principle for the governance of China, according to a statement released Friday after a meeting of the Political Bureau of the Communist Party of China Central Committee.
The meeting, which usually sets the tone for the annual Central Economic Work Conference, an important economic event that maps out economic priorities for the year, said the country will continue its efforts to stabilize economic growth, promote reform, adjust structure, improve people's livelihoods and guard against risks.
Other priorities for 2017 include supply-side structural reform, increasing consumption and improving the investment environment, the statement said.
Growth this year was buttressed by higher infrastructure spending, a real estate boom and strong auto sales, but as property and auto sales are likely to slow in 2017, the economy may fall into a cyclical downturn, J. P. Morgan China Chief Economist Zhu Haibin said.
Zhu suggested the government should set an annual economic growth target at 6 to 7 percent for 2017, avoiding long-term side-effects from the use of fiscal and monetary stimulus and leaving more room for reform.
To shore up growth, China imposed a prudent monetary policy with "a slight easing bias" at the start of 2016, with new bank lending soaring and restrictions on property purchases relaxed, creating the conditions to fuel an economic rebound but risking fanning asset bubbles.
Agreeing with the 6 to 7 percent target, Huang Yiping, vice president of the National School of Development at Peking University, said the government should tread cautiously between securing stable economic growth and promoting reform in 2017.
Huang said reform should be focused on state-owned enterprises and the overhaul of sectors that have lost their competitiveness.
The Chinese investment bank CICC expected the government's growth target to remain at a range of 6.5 to 7 percent for 2017, given the improvement in the economy this year.
Monetary policy will likely remain prudent next year, with more emphasis being put on control of asset bubbles and financial risks, CICC economist Liu Liu said.
China's room for further monetary policy easing will be limited as the Fed is expected to raise interest rates in December 2016 and another one or two times next year, domestic monetary easing will exacerbate capital outflows, and house price surges in major cities will reduce the room for monetary easing, Liu said.
On the fiscal front, analysts said China will maintain its proactive fiscal policy next year, with a higher budget deficit target likely set to support growth.
Standard Chartered Bank economist Ding Shuang said the government may set a budget deficit target of 3.5 percent of GDP for 2017, up from 3.0 percent this year.
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