China: Stable growth in 2017, higher risks beyond – Deutsche Bank

Analysts at Deutsche Bank expect China’s economy to grow 6.5% in 2017 and thinks that the fiscal policy will likely become more expansionary in 2017 as quasi fiscal spending pushes up growth of infrastructure investment.

Key Quotes

“On monetary front, we no longer expect any rate cut in 2017, but the PBoC may loosen credit supply in Q2 to mitigate the slowdown in property sector. We continue to expect two RRR cuts in 2017, though we acknowledge that the PBoC may choose to release liquidity through open market operations instead of explicit RRR cuts. We think CPI inflation will likely pick up to 2.5% in 2017 from 2.1% in October 2016.”

“We see 50% of probability that growth may drop below 6% for a full year sometime between 2018 to 2020. Macro risks are set to rise beyond 2017. The fiscal and monetary easing in 2017 will likely push up leverage ratio, with aggregate debt rising to some 290% of GDP by the end of 2017. We note the property bubble will impose more macro risks, the US rate hikes will further constrain the policy room for PBoC, and the excessive liquidity onshore will likely drive inflation up eventually.”