We maintain our 2017-2018 real GDP growth forecast at 6.8% YoY and 6.7% YoY. We adjust down our 2017-2018 nominal GDP forecast to 10.6% YoY and 9.7% YoY, from 11.5% YoY and 10.3% YoY. Our 2017-18 real GDP growth forecast remains above the consensus forecast of 6.6% YoY and 6.2% YoY, respectively. We expect growth to be resilient at 6.8% YoY in 2H 2017 following the “soft-patch” in 2Q2017, supported by solid domestic demand growth & further recovery in exports.

We lower our 2017 CPI inflation forecast to 1.7% from 2.6%, due to larger-than-expected deflationary impact of the agricultural supply side reform. Meanwhile, we also tune down our 2017-2018 PPI inflation forecast to 5.3% and 2.3% form 7.5% and 3.6%, on the back of disinflationary impact from the ongoing financial deleveraging and softer global inflation outlook.

In our view, monetary policy stance may be a touch “easier” compared with 2Q. Financial deleveraging will likely proceed with a pragmatic approach, instead of being forged ahead in a hasty manner. Therefore, we expect short-term rates to moving down in 2H17, the yield curve to steepen modestly, and the credit spread to narrow. We expect no change to the benchmark lending & deposit rates in the rest of 2017. In addition, PBoC will likely keep the 7 day reverse repo rate stable at 2.45% throughout 2017.

We see USD/CNY holding steady at around 6.78 by end 2017, stronger than our previous forecast of 6.98, in light of a weaker USD trajectory and a stable China macro outlook.

Fiscal policy will likely remain supportive to growth, while the policy emphasis may shift further from expanding gov’t financing to improving policy “efficiency” – i.e. further efforts towards cutting tax and fees, as well as mobilizing idle fiscal funds.

Ongoing economic reforms may help support China’s longer term growth prospect and accelerate China’s transition to a consumer-driven economy. We expect further progress on SOE reform, Hukou / land reforms, and further efforts towards improving income distribution, esp. reforms regarding the social security system.

The main downside risks to our growth inflation forecasts include 1) over-tightening of financial conditions due to strengthening of financial regulations, and 2) a weaker-than-expected property market. On the other hand, the main upside risks to our forecast lies looser-than-expected domestic policy setting and stronger-than-forecast external demand growth.