We have raised our 2017 real GDP forecast to 6.8% YoY from 6.7% YoY, while maintaining our growth forecast of 6.7% YoY for 2018. More importantly, we have revised up our nominal GDP forecast for 2017~18 to 11.5% YoY and 10.3% YoY respectively, from 9.3% YoY and 9.2% YoY. While consumption and manufacturing investment demand are on the mend, recent data suggest that the strength of infrastructure and property investment demand has surprised on the upside. In addition, the pace and magnitude of external demand recovery have also surpassed our expectations. As a result, we now project higher real and nominal growth in 2017 than before.

Investment growth has been accelerating, and will likely stay robust beyond the next few quarters.

Consumer demand will likely stay robust.

Export growth may pick up further.

We raise our 2017~18 CPI forecast to 2.6% and 2.7% from 2.5% and 2.4%. We also revise up our 2017~18 average PPI forecast to 7.5% and 3.6%, from 3.6% and 3.1%. CPI inflation may stay relatively muted in 1H2017,while PPI will likely remain high until 3Q 2017.

PBOC will likely maintain a gentle pace of monetary policy tapering in 1H2017 when CPI inflation is expected to remain in check. Although the benchmark lending and deposit rates are unlikely to be adjusted this year, we expect market interest rates to trend higher, including the interest rate corridor and the Treasury bond yields. We expect the PBOC to raise the 7 day reverse repo rate by another 20bp to 2.55% in 2017, while the Treasury bond yield may continue to climb as the long-term expected nominal GDP growth and investment return rise further along with the cyclical reflation.

We adjust our 2017 year-end USD/CNY forecast to 6.98, from 7.18 previously.

In our view, the ongoing reflation cycle will likely be more sustainable than the market expects. We expect >11% YoY nominal GDP growth in every quarter of 2017, rather than a temporary boost to growth driven by a quarter-long restocking cycle.

The main downside risks to our forecast are a sharp decline in external demand, and harsher-than-expected monetary tightening triggered by higher inflation or policy missteps during the financial market deleveraging process.