Research: China outlook - Recovery set to lose steam in 2017

Growth:

• Chinese growth indicators continue to support the case for a moderate recovery this year. PMIs have trended higher and industrial production and profits have rebounded too. Indicators for electricity production and steel production confirm this.

• The recovery is being driven by (a) fiscal stimulus via infrastructure investments, (b) a recovery in the construction sector due to strong home sales and reduction in home inventories and (c) a moderate export recovery supported by a 10% weakening of the CNY.

• Looking ahead, we expect to see some moderation in the recovery going into 2017 as the stimulus effects fade slightly, and the biggest boost to construction should fade as home sales growth has come down in response to regional tightening measures. We expect average GDP growth to be 6.6% in 2017 (consensus: 6.3%).

Policy:

• We expect monetary policy to be on hold for the rest of this year but expect to see a resumption of easing in Q2 17 as the cycle loses some steam. However, fiscal policy is the preferred tool for now as the government is concerned over rising leverage in the financial system and regional housing bubbles. The government has already indicated a further fiscal easing in H2 but not how much. We believe the fiscal growth impact will on average be slightly smaller in 2017 versus 2016.

Markets:

• We look for a continuation of the weakening trend of the CNY, not least versus the EUR where we expect a 10% depreciation +12M. For 2016, we believe there is more upside as momentum is positive and the business cycle still supports profits. However, stock markets will be more challenged in 2017 as growth momentum fades a bit again.

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