China outlook: Moderate slowdown and CNY stabilisation

  • We look for a moderate slowdown in China over the next year due to financial tightening and measures to cool housing. We forecast GDP growth to be 6.8% in 2017 and to fall to 6.3% in 2018. A hard landing is not likely, though, as residential inventories are low and exports are supported by robust global growth.

  • We believe the 19th Party Congress will lead the way for more implementation of economic reforms. Inefficient indebted SOE's and overcapacity is at the core of the problem.

  • We expect more steps to contain financial risks over the next year, but it will likely continue in a ‘two steps forward - one step back' fashion.

  • China's rebalancing is progressing but too slowly in our view. The economy is still too dependent on construction and infrastructure investments. This could eventually lead to a crisis but it is not likely to happen in the next few years.

  • We expect the CNY to be broadly stable versus the USD over the next year but to weaken versus the EUR. Chinese stocks will see less tailwind as growth slows and bond yields have likely peaked for now.

When China's p olitical leaders meet for the 19th Congress of the Communist Party on 18 October, they are likely to be very satisfied with the economic and financial developments. After going through a financial storm in 2015 and early 2016 that caused fears of a very hard landing, the situation has turned to one of calm and robust growth. GDP in the first two quarters came in at a higher-than-expected 6.9% and the currency has turned around and strengthened 5% against the USD this year - contrary to market expectations. The goal of stability ahead of the Congress has been achieved.

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