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China’s outlook in 2017

China appears set to provide plenty of opportunity for traders in 2017. Follow our analysis of key events here and find out what they could mean for the markets, and take a position with an IG account.

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Why might this affect traders?

Stock market troubles and a feud with the US bookended China’s 2016 – and these issues once again look likely to dominate the agenda in the Far East.

With Chinese president Xi Jinping also seeking to reaffirm his leadership and manage a politically sensitive Communist party reshuffle – which could have ramifications at home and abroad – traders will be watching developments in China closely.

Three matters in particular are likely to influence market movements this year: China’s continued economic slowdown, its foreign policy, and the Communist party congress.

Key markets to watch

Markets Bid Offer Updated Change
China 300
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China A50
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China H-Shares
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USD/CNH
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EUR/CNH
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CNH/JPY
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Copper
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Prices above are subject to our website terms and conditions. Prices are indicative only.

Economic slowdown

Look out for:

  • Indications the economy is performing poorly
  • Sharply rising debt
  • Signs of China devaluing the yuan

China’s 2016 got off to an inauspicious start, as fears over its manufacturing, economic and stock market slowdown caused chaos throughout global markets. 

Most of the distress was felt at the start of the year, with Chinese regulators activating a suspension in trading twice within the space of a week. However, the intended safety measure failed to contain the chaos – instead it spread the selloff to European and US indices – and was quickly abandoned.

Panic around China’s economy gradually abated as the year progressed, but it never truly subsided. Traders will hope that Chinese regulators have learnt from the mistakes of 2016, but any sign that China’s economy is performing below expectations could provoke a global selloff once again.

Growth targets

China’s economy is currently growing at its weakest rate for 25 years, and is predicted to slow even further as demand for exports slackens and the government shifts its economic focus towards consumption and services. To counteract this, China has already pledged a more proactive fiscal policy – vowing to enhance control over local government debt in a bid to sustain steady growth – and has set a GDP target of around 6.5% for 2017, which would represent only a gentle year-on-year slowdown.

But rumours abound that Xi isn’t wedded to that target, choosing to focus his concerns more on rising debt and an uncertain global environment. Any indication that China’s economy is performing below expectations could see the markets panic again: starting with the China 300, then spreading to other indices around the world.

The yuan

It’s also a time of heightened anxiety about the yuan, which slid to eight-year lows amid speculation of capital outflows in the wake of Donald Trump's election victory. USD/CNH will be a key market to watch, given Trump’s previous accusations of deliberate devaluation and increasingly prickly China-US relations.

Keep an eye on commodity stocks and commodity prices, too. These were badly affected amid the chaos of 2016, and could suffer once again if a decline in manufacturing or exports means China needs to reduce its oil and metal consumption.

Foreign policy

​Look out for:

    • Inflammatory words from Trump
    • Developments in the South China Sea 
    • US interaction with Taiwan

Donald Trump’s campaign trail was littered with anti-China rhetoric, but his stance has significantly softened since taking office – and Xi’s visit to the US in April proved positive. Still, with a number of fraught political situations for both leaders to contend with, tensions could easily resurface. Here are some of the key flashpoints that Xi – and the markets – will be paying close attention to: 

A potential trade war

Before Trump’s inauguration, tough talking from both sides had the potential to lead to a full-blown trade war. A far more conciliatory tone has been struck since, and a 100-day plan to address trade imbalances between the two nations was put in place after Xi met with the US president in April.

While the finer details still need to be hammered out, the possibility of an all-out trade war looks to have been averted. However, keep an eye on developments if the heads of state struggle to formalise the agreement, or if Chinese economic growth begins to flatline.

South China Sea

The South China Sea will be another potential minefield. China’s seizure of land and building of artificial islands has led to acrimonious territorial disputes with neighbours Vietnam and the Philippines, and sparked fears in the US that China could exert dominance throughout the region.

Perhaps of greater concern to the US is that China might seize complete control of one of the world’s most valuable trade routes. Trump has been predictably forthright with his opinion on proceedings, and an already tense geopolitical situation could easily escalate.

Taiwan

Taiwan is also likely to be on Xi’s agenda after Trump antagonised Beijing by speaking directly with the Taiwanese president – breaking decades of diplomatic protocol in the process – and made inflammatory remarks over the ‘One China’ policy. While Trump has since agreed to honour China’s claim over Taiwan, don’t rule out a change in stance if hostilities escalate in other policy areas. 

Also look out for:

  • China’s relationship with Russia
  • Escalations in North Korea
  • Rodrigo Duterte and the Philippines

Communist party congress

Look out for:

  • Any signs of social unrest
  • Changes in domestic or foreign policy
  • Xi’s political appointments

The Chinese Communist party will be holding its 19th National Congress – a process in which the party chooses its top leadership positions – in the autumn of 2017. 

Steadying the ship

After an unpredictable 2016, traders could be forgiven for viewing the National Congress with some trepidation. In truth, it is hugely unlikely that Xi will see any challenge to his leadership this year – but a chance to consolidate power and set the tone for the next five years will determine how he acts over the coming months. 

His primary focus will be ensuring China stays on a relatively smooth course until the Congress takes place. This means he’ll need to keep the economy stable and stave off any unrest that unemployment or a debt crisis could bring. He’ll be equally keen to avoid any foreign policy disasters – especially with Trump – that could call his leadership into question. 

Consolidating power

Xi will be hoping to avoid distractions so he can concentrate on deepening his control of the party by elevating allies to key positions. However, this in itself will create an intense and potentially treacherous period of political jockeying. 

Any signs that Xi’s political manoeuvring has backfired could play out on global markets in a big way – provoking reactions around the world.

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