We maintain our 2016 real GDP growth forecast at 6.7% YoY, and adjust our 2017 real GDP growth forecast to 6.6% YoY from 6.7% YoY. Meanwhile, we expect nominal GDP growth to edge up to 8.3% YoY in 2017 from 8.0% YoY in 2016. Our forecasts are slightly higher than the current consensus real GDP growth forecasts of 6.6% YoY and 6.3% YoY for 2016 and 2017, respectively. Furthermore, we expect real GDP growth to edge down to 6.5% YoY in 2018. Consumption will likely contribute more to the headline GDP growth in 2017, fixed asset investment growth is expected to soften moderately, and external demand may improve.

CPI inflation is estimated to be at around 1.7% YoY in 2017, and average PPI may recover further to 1.9% YoY in 2017 from -1.6% YoY in 2016. As a result, GDP deflator will likely pick up to 1.6% YoY in 2017 from 1.1% YoY in 2016.

In our view, monetary policy has little room to ease further in the near term given that real interest rates have fallen significantly on the back of rising inflation, particularly that of property price inflation. We expect no change to the benchmark interest rates in 2017. The PBOC may move down the 7 day reverse repurchase rate by 10bp in 2H2017. Meanwhile, there may be 1 RRR cut in 2H2017. We expect USD/CNY to trade around 6.78 by end-2016 and 6.98 by end-2017.

Fiscal policy is likely to remain a key driver of growth support in 2017, but the policy mix may tilt towards promoting consumer demand vs. investment spending. We will likely see more efforts towards tax cuts and subsidies to promote personal income & consumption growth, as well as increased public spending in education, health care and poverty alleviation.

We expect further progress to be made in the areas of fiscal, Hukou, and land reforms to expedite China’s transition towards a more consumer-driven economy. Meanwhile, progress in SOE reforms may revolve around a more market-oriented framework for mixed ownership structure reform, SOE exits, and opening up more of the regulated industries.

We see the risks to our 2017 growth and inflation forecasts as balanced. The main macro and market uncertainties lay in a sharper-than-expected property market correction, policy risks associated with stricter financial market regulations, and potential external demand volatilities. On the other hand, the upside risks include stronger-than-expected personal consumption and investment demand, as well as faster external demand growth.

The growth structure and policy mix next year will likely benefit personal consumption the most. We also expect a more stable macro backdrop and abundant liquidity to support investment in the secular growth sectors and new industries.