China 2017 outlook: Reflation, deceleration, and depreciation – Goldman Sachs

Research Team at Goldman Sachs, suggests that after more than a year of very substantial reflationary efforts—including fiscal policy (on and off-budget), monetary policy (lower rates and directed lending), rapid credit growth, and measures to boost demand in areas such as housing, Chinese real GDP growth looks on track to be within the 2016 target range of 6.5%-7%. 

Key Quotes

“Producer prices are rising again after years of deflation.”

“With growth on track, policymakers have shifted in the last two months towards a focus on containing risks.  Property restrictions have been implemented across tier 1 and 2 cities to control housing prices.  Probably to address concerns about booming shadow banking activity, rising inflationary pressures, asset bubbles, and FX outflows, short-term repo rates have been somewhat higher and more volatile since mid-October. Fiscal policy seems apt to tighten at least slightly in the short term, given this year’s official deficit target.”

“We expect China’s “bumpy deceleration” to continue in 2017.  The challenges of maintaining high growth while attempting to fend off financial and other risks are likely to intensify next year and will require continued strong fiscal and credit support—which we believe authorities will be willing to provide.  As policymakers’ growth goals become increasingly challenging in light of lower supply-side potential output, they may need to become more flexible on secondary policy targets.”

“Risks for 2017 include the possibility of higher inflation and further currency depreciation (we forecast USDCNY at 7.30 at end-2017). Fiscal/credit stimulus and the ongoing depreciation have shifted domestic price pressures to the upside.”