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Predictions for 2016 through 20 questions

Updated: Dec 31,2015 7:37 AM     China Daily

As a new year approaches, China Daily invited researchers and experts to share their thoughts on 20 major issues that are expected to have an impact in 2016.

1. Will the Chinese economic slowdown continue?

Cao Heping, a professor at the School of Economics, Peking University

Yes. Generally speaking, China’s economic growth will slow down next year. But the Chinese economy will still maintain a sustainable growth rate. I expect China’s GDP growth rate to be between 6.7 percent and 7.7 percent in 2016.

The traditional economy will see low speed growth, signaling a slowdown in economic growth. But the new economy could come up with a series of surprises, boosting growth. The new economy is the result of the transition from a manufacturing-based to a service-based economy.

For instance, the telecommunications and computer sectors have developed over the three decades since reform and opening-up. With the rapid development of the Internet, which has led to the technological revolution of “Internet Plus”, the new economy could get a fresh shot in the arm. The achievements of the new economy in the short term may be more astonishing than the achievements of domestic Internet giants such as Baidu, Alibaba and Tencent in recent years.

In the future, I expect the new economy to overshadow the traditional economy.

2. Will China’s inflation rate fall below 1 percent?

Mei Xinyu, senior researcher at the International Trade and Economic Cooperation Institute of the Ministry of Commerce

No. The year 2015 was the first time the inflation rates of the G7 countries were below 2 percent since 1932, and the inflation rate will remain comparatively low globally in 2016. China’s overall inflation rate next year will be less than 2 percent. The low inflation rate in China this year was the result of a sharp decline in the prices of raw materials and energy. Since the prices are not likely to plummet further next year, China’s inflation rate is not expected to fall below 1 percent.

Internationally, prices of raw material and energy will remain low for a long time. In 2015, global crude oil prices fell below $40 a barrel. And in 2016, Saudi Arabia may increase crude production because of domestic political reasons and Iran will return to the global crude market, increasing the production by 1 million barrels a day. Under such circumstances, crude prices could fall even further.

Also, the producer price index will continue to decline, which will have a negative impact on inflation.

According to my research, China’s inflationary pressure has come mainly from the fast rise in labor cost in recent years. But next year the increase in the cost of domestic labor will slow down because of the economic downturn, which will further reduce the pressure of labor costs on inflation.

3. Will the renminbi depreciation continue?

Song Yu, chief economist at Goldman Sachs for China

Yes. Despite top policymakers reiterating their commitment to maintaining exchange rate stability and policy to keep the renminbi largely steady, uncertainty over China’s foreign exchange policy and the sustainability of the Chinese currency’s value remains high.

We (at Goldman Sachs) see the case for a weaker renminbi given the challenges of domestic growth and deflation and the potentially large pent-up demand of Chinese consumers for foreign assets, although we do not believe that the renminbi is greatly above fair value.

After all, China shows few symptoms of currency over-valuation. For example, China’s trade surplus is still strong and Chinese exports’ share in the global market has remained quite stable. But letting the exchange rate float freely could conceivably lead to large currency overshooting (much more weakening), depending on the prevailing market environment.

Our baseline expects a moderate 3 to 4 percent depreciation of the renminbi against the US dollar in 2016.

This view envisages what could be characterized as a second-best reform scenario-namely, that a favorable window of opportunity for reform will arrive and the authorities will take advantage of that to transition the renminbi regime to a market-based (clean float) one.

4. Will the Chinese stock market see a steady boom?

Gao Ting, head of China strategy at UBS Securities Co

No. We (at UBS Securities) forecast a 1 percent profit decline for listed companies in the A-share market in 2016, compared with the estimate of 4 percent growth earlier this year. Corporate revenue will be under pressure because of weakened demand and economic deflationary pressure next year.

We expect the CSI 300 Index to be traded flat around 3,700 points by the end of 2016 (no big rise from the market at the end of 2015). The price-earning ratio is predicted to be 13.5.

Rising debt defaults by companies will hurt the asset quality of banks and reduce investors’ risk appetite. In addition, based on experiences, the market does not perform well when there are strong expectations for a weaker renminbi.

But sectors such as consumption, healthcare and information technology will continue to outperform the rest of the market next year.

The weak growth momentum will weigh heavily on overall market sentiment, and the A-share market will be more liquidity-driven next year when Chinese policymakers are expected to launch more measures to stimulate growth.

The top leaders may strengthen fiscal and credit supports on infrastructure construction, but they are unlikely to launch a new round of aggressive stimulus policies.

5. Can China solve the problem of industrial overcapacity once and for all?

Li Yiping, a professor at the School of Economics, Renmin University of China

No. Solving the excessive production capacity problem is a long-term and difficult task, which cannot be performed in one year. Challenges such as cutting industrial overcapacity require unremitting and long-time efforts.

In recent years, local authorities have regarded the real estate sector, along with their large-scale infrastructure construction since the beginning of reform and opening-up, as the driver of rapid economic growth, which has resulted in the overcapacity of the steel and cement industries. Moreover, we have been over-dependent on overseas market demand for a long time, which has led to the overcapacity of low-price export products. And the recession in production has resulted in the overcapacity of coal and electricity sectors.

Economic structural adjustment is crucial to reducing overcapacity, which should be mainly decided by market mechanisms. Several Western countries eliminated overcapacity and encouraged innovation to counter economic crises, which helped their economies prosper.

So the Chinese government should intervene in the market as little as possible and let it decide the direction of adjustment and which outdated capacity should be eliminated-and only then China’s industries and products can rise to the middle and high end of the global industrial chain through innovation.

6. Is there likely to be a local government debt crisis?

Yang Zhiyong, a researcher at the National Academy of Economic Strategy, affiliated to the Chinese Academy of Social Sciences

No. The risk of China’s local government debt is generally controllable, so a local government debt crisis is not likely next year. In 2015, China’s overall local government debt added up to 16 trillion yuan ($2.5 trillion) and the national debt reached about 11 trillion yuan. The overall sum of government debt is less than 50 percent of the national GDP, which is lower than the generally accepted warning line of 60 percent.

However, there are three major problems that we should be aware of. First, local governments’ capabilities to cope with debt risk are different. The central government, therefore, should take different measures accordingly, such as supporting areas with low incomes, to avoid the spread of debt risks.

Second, local government debt faces huge pressure of short-term repayment. In 2015, local areas issued 3.18 trillion yuan worth of replacement bonds, which effectively dealt with the short-term repayment issue and reduced the debt financing cost. Hence, in 2016, the authorities should issue more replacement bonds to ease the pressure of short-term payment.

Third, we should expedite the process of building an overall local government debt repayment plan to cope with both the incremental and existing debts. Part of the existing debt should be repaid by selling off government assets. And incremental debts should be repaid through the reasonable and normalized distribution of central and local governments’ incomes.

7. Will China’s real estate see a rapid recovery?

Zhao Xiao, a professor of economics at the University of Science and Technology Beijing

No. I don’t think China’s real estate market will recover next year. Instead, its condition could worsen than this year.

Although China’s overall real estate sales improved this year compared with that of last year, property developers are still very cautious. Major real estate indicators such as purchase of land, new investment in the property sector and newly built houses all show poor performance. So I am not optimistic about overall property sales next year.

Every index shows that China’s real estate industry is reaching a historical turning point, which is the trend of the market. The major market moves next year will be big real estate developers acquiring small companies, rather than investing in new land and new housing construction. I suppose next year there will be zero growth in real estate investment for the first time.

Real estate destocking will face huge pressure next year. Currently, there are 696 million square meters of unsold housing and more than 7 billion square meters of housing under construction nationwide, which could need five to eight years for them to be sold.

The central government has launched a series of favorable policies for real estate destocking. The orientation of the policies is good, but whether they will be conducive to destocking depends on how they are implemented.

8. Will more effective measures be taken to ease air pollution in China?

Zhou Dadi, vice-director of and senior researcher at China Energy Research Society

That depends. Actually, the authorities and researchers have already realized what measures could be effective. The issue now is how to implement them.

These measures include, most importantly, adjusting the economic structure. For example, steel production needs to be reduced. But the move will hurt steel plants, and whether it can be implemented will test the leadership’s determination to fight air pollution despite the opposition of interest groups.

Another necessary measure is to optimize energy supply. China still relies on coal as its main energy source, which cannot be fundamentally changed in a few years, let alone 2016. But in the new year, we can at least increase the supply of natural gas to replace some of the coal used to generate energy, which, in turn, would raise heating charges in winter and increase the operation costs of enterprises. The government, therefore, needs transparent discussions to persuade the public.

In particular, for metropolises such as Beijing, there might be a stricter limit on the use of cars. At present, Beijing residents cannot drive their cars one day a week. This restriction could be tightened next year, and people might be prevented from driving their cars, for example, on weekdays, because vehicle emissions are one of the key sources of air pollution. Of course, the authorities need public discussions so as to convince residents about the necessity of such a move.

9 Will there be a dramatic rise in the number of couples applying to have a second child?

Qu Xiaobo, a professor of urban-rural development at Shanghai Academy

No. The two-child policy has been one of the hottest topics in 2015, because people want to defend their rights to have more than one child. Now that the central leadership has allowed all couples to have two children, those eligible will consider all factors before deciding whether to have a second child or not.

With living costs increasing, a couple will have to spend a lot of money and time to raise a second child. A popular practice among Chinese is asking their retired parents to care for the child, but for that their parents have to be healthy enough for the task. Couples whose parents cannot do so must hire a child minder, which only high-income families can afford to do.

Only a limited number of couples meet all the requirements-a stable income, healthy and retired parents, or high income. More importantly, such couples must be relatively young to have a second child. The fact is, not all such couples are willing to have two children. Therefore, the number of people applying to have a second child will not be as high as expected.

10. Will global oil prices bottom out and begin to rise?

Lin Boqiang, a professor of energy economy at Xiamen University

Yes. The shrinking economic capacity brought down oil prices in 2015. But the trend of economic decline will reverse and the US Federal Reserve has already raised interest rates. The revival of the US economy means more production, more logistical needs, more electricity, as well as more oil consumption.

Actually, the overcapacity in the world is not as high as imagined and oil prices won’t fall for too long. Oil prices can be expected to bottom out at the end of the first quarter of 2016 and start rising in the second.

But there will not be a dramatic rise in global oil prices, because global economic growth will not be dramatic. Therefore, global oil prices are expected to rise above $40 a barrel in the second quarter of 2016 but not exceed $50 a barrel at the end of the year.

11. Will Sino-Japanese relations improve?

Zhou Yongsheng, a professor of Japanese studies at China Foreign Affairs University

Yes. Beijing-Tokyo ties do have potential to improve in the coming year, but some bumps are almost unavoidable. Japanese Prime Minister Shinzo Abe forced two controversial security bills through parliament this year, and these pose a grave security threat to China. Encouraged (or abducted) by the United States, Japan may, and in fact is, preparing to intervene in the South China Sea affairs. This is also worth noting.

Along with Abe’s so-called value diplomacy that aims at containing China, the two countries’ enduring dispute over China’s Diaoyu Islands will remain a major sore point, even the most combustible part of the bilateral relations.

For example, both sides are yet to establish a maritime communication mechanism between their defense departments after a series of negotiations, which is thought to be related to Japan’s refusal to include the Diaoyu Islands and its surrounding waters in the mechanism.

True, the Sixth China-Japan-Republic of Korea Summit resumed in Seoul last month after a three-year hiatus. But its diplomatic significance outweighs its actual impact on the three neighbors, as there has been little substantial improvement in China-Japan and ROK-Japan relations, although the recent compromise reached between Japan and the ROK may help improve ties between the two countries.

The biggest uncertainty in ties between China and Japan lies in Japan’s persistent pursuit of becoming a “normal state”, which is hardly convincing given its dubiously specified conditions for waging war; so major breakthroughs are not likely to happen in a short period of time.

To push for better ties between China and Japan requires Japan’s sincere efforts to address the aforementioned concerns. For its part, China should keep engaging in high-level contacts with Japan, while encouraging economic cooperation and grassroots exchanges. Also, it could seek closer cooperation with other countries in the region to help Tokyo get rid of its parochial mentality.

12. Will the tensions in South China Sea and East China Sea escalate?

Jin Yongming, director of the Ocean Strategy Studies Center at the Shanghai Academy of Social Sciences

Possible, but they will be controllable. Basically, the disputes in the South China Sea with some members of the Association of Southeast Asian Nations and in the East China Sea with Japan, range from maritime borderlines and exploitation of oceanic resources to security issues.

In particular, it is almost impossible to peacefully resolve the territorial clashes near China’s Nansha Islands in the immediate future, because neither China nor the other claimant states are likely to compromise. Enhancing their maritime cooperation in less sensitive fields and expediting their negotiations over a code of conduct for the South China Sea, might help defuse the tensions.

China and the United States also have different standpoints regarding whether the military activities in other countries’ exclusive economic zones and innocent passage (of foreign warships) through territorial waters are permitted without advance approval. The EEZ issue should be dealt with through bilateral negotiations, while warships should abide by the domestic maritime regulations and laws of the countries concerned.

That China and the Republic of Korea started their first formal talks on maritime demarcation in Seoul last Tuesday, is likely to serve as a precedent in similar transnational negotiations, should they manage to reach a consensus through dialogue. Of course, China should not take any steps backwards particularly in the exploitation of fishery resources.

China does not accept nor will it participate in the Philippines’s South China Sea arbitration, which makes little difference to their core differences over some Nansha islets and reefs and maritime demarcation. To prevent the clashes from spilling over requires Beijing to make consistent responses to the accusations made by Manila, and further disclose its stance on the South China Sea issues. That being said, China still has a mountain to climb in promoting its “dual track” approach.

13. Will there be any breakthroughs in building the new type of major power relationship between China and the United States?

Li Haidong, a professor of US studies at China Foreign Affairs University

Yes. The promotion of the new type of major power relationship has borne fruit in the past two years, and will keep making progress with the rise of China and the expanding cooperation between China and the US.

True, the US leadership still has some doubts about the Beijing-proposed concept, but its significance is being recognized by more people. China, therefore, should seek closer coordination with the US in accordance with their respective situations, to maximize the exemplary effects of the new type of major power relationship in the making.

The past two years have witnessed increasingly routine meetings between both leaders, diversifying communication mechanisms, and deepening bilateral cooperation in the domains of climate change, anti-terrorism and cybersecurity. Cooperative exchanges will become more frequent next year, which is in the interests of both sides.

In general, their management and control of disputes are effective and conducted in a responsible and prudent manner. However, as the 2016 US presidential election approaches, both governments are obliged to avoid serious clashes in certain disputes, which might be repeatedly used by some “China threat” upholders to spoil the bilateral bond.

It is becoming clear that China gives more priority to its diplomatic ties with the US, acknowledging that their interactions have more extensive impacts on regional and global affairs. However, the outstanding disparities over “freedom of navigation” and Washington’s latest arms sale to Taiwan, require both countries to exercise extra caution and vigilance.

What should also be noticed is that US President Barack Obama, who will automatically leave office after the upcoming election, is slightly but almost certainly being marginalized in directing the country’s foreign policy. The Department of Defense, for instance, often disagrees with him when it comes to the US’s stance on the South China Sea disputes.

China needs to stay alert to the possibility that the US defense authorities make their own decisions to challenge China’s legitimate interests in the region. On the other hand, under the framework of the United Nations, both nations should cooperate closely in fighting the Islamic State group and addressing global climate change, while avoiding fueling their disagreements on the security structure and development mode in the Asia-Pacific region.

14. Will the implementation of the Belt and Road Initiative break fresh ground?

Wang Yiwei, a professor in international relations at Renmin University of China

Yes. For the Chinese government, the priority in the past two years has been promoting the Silk Road Economic Belt and the 21st Century Maritime Silk Road worldwide, and seeking to achieve consensuses with relevant countries and international organizations (over 60 have said yes). In the following year, it will be the operation that counts.

The foreseeable breakthroughs at home and abroad will take place in some major inland infrastructural projects such as the China-Pakistan Economic Corridor, and the revamping of roadside harbors, including Jakarta in Indonesia, Sihanoukville in Cambodia, and Gwadar Port in Pakistan.

Besides, China is likely to make progress in negotiations on some major free trade agreements, for example, the ones with Sri Lanka and the Gulf Cooperation Council, as well as the Regional Comprehensive Economic Partnership.

The biggest uncertainty of all may be China’s own economic well-being. As for the Belt and Road Initiative, which largely rests upon interconnectivity, strategic synergy, transnational capacity cooperation, and the exploration of the third-party markets, next year’s focus should be on enhancing international cooperation to deal with China’s excessive capacity in traditional industries such as steel and cement.

More, to avoid potential geopolitical risks, China should give priority to expanding its markets in Southeast Asia, South Asia, Central Asia, and East and Central Europe, with a focus on promoting its new advantageous capacity involving high-speed trains, nuclear power and telecommunications.

15. Will fundamental changes take place in global climate change governance after the Paris deal?

Zhang Haibin, a professor with Peking University

Yes. The historic agreement passed at the Paris climate change conference, along with the 2030 Agenda for Sustainable Development passed in the United Nations three months ago, finally made it official that development should be green and low-carbon by then. The 2030 Agenda for Sustainable Development, in particular, is a legally binding promise delivered by the global leaders from more than 190 countries, signaling significant improvement in transparency.

The Paris deal, meanwhile, will surely offer a boost to global confidence in dealing with worsening climate change, encouraging all parties to press ahead with the reform from the bottom up, not the other way round. Against the backdrop of a global economic downturn and the unpromising struggle against terrorism, it also serves as a silver lining that the international community is willing and able to coordinate.

China, which used to be a follower, now plays a bigger role in reform of global governance, as its capability and willingness to cooperate have increased in the past years. Yet, it is becoming clear that the developed economies have every intention of shirking their responsibilities, while fissures are widening among the developing countries.

For underdeveloped countries, especially some small island states, combating climate change is about their very survival; while for major developing countries, it is about their long-term growth. They should have worked together to urge the West to fulfill their responsibilities; unfortunately, the nations seeking survival along with the affluent nations are imposing more pressure on rising China and India.

This should not worry Beijing too much, though, as environmental protection has become a consensus of Chinese citizens, whose living conditions are facing graver environmental challenges, such as the frequent severe smog that swathes a large part of the country.

Private capital will be given wider access to the global climate governance, as the Paris deal indicates, signaling the long-awaited “climate justice” for all countries alike. Judging by its previous performance in fulfilling its international commitments, China will peak its carbon emissions years before 2030.

16. Will Europe significantly alter its refugee policies?

Chu Yin, an associate professor at the University of International Relations in Beijing, and a research fellow at the Center for China and Globalization

Hard to tell, although in the face of mounting pressure at home and abroad, Europe is already steering its refugee policies in a more conservative direction. Even the optimistic German Chancellor Angela Merkel has agreed to “appreciably reduce the number of refugees”.

For the European Union, the major adjustments will be encouraging frontier countries such as Greece and Turkey (a would-be EU member) and stabilizing the Middle East region, in order to accommodate West-bound refugees. As for the asylum-seekers who have managed to enter Europe, they will probably be settled proportionately within the bloc.

What led to the outbreak of the refugee crisis is complicated. European countries’ illegitimate interventions in Middle East affairs, which destroyed a few regional stabilizers including the Muammar Gaddafi government of Libya during the so-called color revolution, must be primarily blamed for the mess.

Also, the EU’s expansion makes it harder for all members to control the entry of an increasing number of asylum-seekers from Arab countries. For certain political purposes, Turkey loosened its border controls in recent years, knowingly allowing more refugees to enter Europe.

Despite the temporary challenges it may pose to local social order, the current influx of refugees is more an opportunity for the aging European population. A majority of the refugees are well-educated, relatively wealthy, and technically skilled Syrians, who had to pay at least 6,000 euros ($6,589) to arrive in Europe. They are likely to quench the thirst in Europe for quality labor resources.

More importantly, they are victims, not upholders, of the regional extremism represented by the Islamic State militants, and needless to say the free flow of people can hardly be restricted in the age of globalization.

17. Will new measures be taken in China’s anti-graft campaign?

Zhuang Deshui, deputy director of the Clean Governance Research Center at Peking University

Yes. The measures taken in 2015, such as the Communist Party of China implementing the “strictest discipline” for its members, have made it obvious that the top leadership is trying to institutionalize a system against corruption. In the coming year, more attention will be paid to the implementation of that discipline and other corruption-preventing mechanisms, so that the law and Party rules truly play their role in curbing corruption.

Besides, over 100 “tigers”, or senior corrupt officials, have been caught from 2012 to 2015, which shows the firm determination of the top leadership to root out corruption, as well as how rampant corruption had become over the past years. As a result of the anti-corruption campaign, corrupt officials have been generally deterred from holding out greedy hands any more. In 2016, the key job will be to prevent officials from becoming corrupt instead of punishing them afterwards.

To sum up, in the past three years, the top leadership has been mainly trying to curb corruption; in the coming year the emphasis will be shifted to preventing officials from becoming corrupt.

18. If the Democratic Progressive Party wins the election in Taiwan in 2016, will that affect the cross-Straits relationship?

Zhang Guanhua, director of the Institute of Taiwan Studies at the Chinese Academy of Social Sciences

Yes. The DPP does not recognize the 1992 Consensus that stresses the one-China principle; moreover, it follows a philosophy of seeking “Taiwan independence”. If it wins the election, the political cross-Straits understanding will be damaged.

The cooperative arrangements between the Chinese mainland and Taiwan, such as the economic cooperative committee, will also be hurt, because they are all based on the 1992 Consensus as the political foundation. The end of political cross-Straits cooperation would be bad news for both the Chinese mainland and Taiwan, as they face the common pressure of slowing economies.

Many argue that the island’s economic slowdown might pressure the DPP to change its approach, but the words and deeds of the DPP leaders, especially its chairwoman, Tsai Ing-wen, show they are not so rational as people expect them to be. They say the status quo should be maintained, but then constantly challenge the one-China principle. The DPP is in general a destroyer of the cross-Straits relationship and there is no reason to expect it will change its practice should it win the election.

19. Will there be a serious conflict on the Korean Peninsula?

Zheng Jiyong, an associate professor on Korean Peninsula studies at Fudan University

No. It is in the interests of neither side to break the status quo on the Korean Peninsula.

For the Democratic People’s Republic of Korea, even though its leader Kim Yong-un said the country would defend its sovereignty with atomic and hydrogen bombs, the possibility of the state owning a hydrogen bomb is extremely low, and it has no intention of seeking more military strength. The DPRK benefits most from the status quo on the Korean Peninsula because the US and the Republic of Korea won’t challenge it under the shadow of its possible nuclear capability; if it insists on nuclear tests, it will only get less from them.

Besides, China and the DPRK are enlarging their bilateral trade. If the DPRK does more nuclear tests, China will reduce, even cut, the aid it extends to its neighbor, which would be a huge loss. The DPRK itself is trying to improve its economy and raise the livelihoods of its residents, a process that would be curbed if a war broke out.

For the ROK, the situation is similar because a military conflict would not bring any benefits. The ROK faces National Assembly elections next year and a presidential election in 2017, and the candidates can be expected to utter some bold words in the election campaigns; but all they want are votes and no rational ROK politician really wants a war with the DPRK. To sum up, a major military conflict on the Korean Peninsula is unlikely because it is in the interests of no one.

20. Will terrorist attacks be on the rise?

Gong Honglie, an associate professor at School of International Studies, Nanjing University

No. The scenario in 2015 can be called the worst case. It was the rise of the Islamic State group and its advocated extremism that made so many attacks possible.

However, there is no reason to be optimistic about the global efforts against terrorism because the Middle East is still in political chaos. Besides, global powers, such as the US, Russia and their European counterparts, are still arguing with each other over Middle East affairs.

For China, the situation is hardly encouraging, either, because Central Asia on its Western border is far from being secure and stable. That might threaten its Xinjiang Uygur autonomous region, even the Belt and Road Initiative, of which Central Asia is a key part.

Yet there is no need to exaggerate the threat of terrorism, because increasingly more nations are taking stricter security measures against the IS extremists. In China, separatists are no longer able to attack big cities as they did in 2014 and they have turned to remote, border regions instead. Therefore we can expect fewer terrorist attacks but it will be a long time before we totally root this evil out.