China 2016 outlook - Three Rs: Rebalancing, Risk and Reform
Key themes for 2016: Three Rs
Economic Rebalancing, Manage Risks, Monitor Reforms
What to recognize: Economy is slowing but rebalancing
Headline growth to slow to 6.3%, with continuous polarisation between the new and old economy
Slowdown is driven by structural factors (aging population) and medium-term imbalances (from post-crisis stimuli)
Economic rebalancing has made progress and will continue; risk of hard-landing is low
What to look out for: Risks and volatility are on the rise
Deflation continues to plague industrial sectors – look for actions to divest excess capacity
Leverage is high and burdensome – look for increased credit events and debt restructuring
Financial system is rebalancing but fragile – look for more market volatility and higher NPLs
External account is liberalizing – look for more volatile currency movements and capital flow
What to focus on: Cyclical policies and structural reforms
Cyclical policies to manage macro risks:
- Monetary policy to contain liquidity/financial risks (e.g. RRR cuts to counter capital outflows)
- Fiscal policy to support the economy and mitigate hard-landing risks (e.g. higher fiscal deficits)
- Currency policy to prevent excessive FX tightening (e.g. the CNY index to remain stable)
Economic reforms to cure structural imbalances: watch for SOE reforms, debt restructuring and destocking
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