We raise our 2018 real GDP growth forecast to 6.9% YoY, vs. the current consensus forecast of 6.4% YoY. We are more optimistic on the growth of consumption, property investment, and manufacturing capex compared with the consensus view. For 2019, we expect real GDP growth to remain robust at 6.8%. Moreover, we expect nominal GDP growth to be above 10% YoY in both 2018 and 2019.

CPI inflation may pick up to 2.5% YoY in 2018 from 1.6% YoY in 2017, while 2018 average PPI is expected to “normalize” at 3% YoY. Consequently, GDP deflator is expected to soften to 3.4% YoY in 2018 from 4.2% YoY in 2017.

Monetary policy will likely continue to withdraw stimulus on the back of sustained reflation and declining real interest rates. Although our baseline forecast does not include any changes to the benchmark interest rates and RRR next year, we expect market rates to trend up further. We see a 30bp increase in the 7 day reverse repo rate, and the 10 year treasury yield may rise to 4% by the end of 2018. Going forward, RRR may move towards “normalization” at a lower nominal rate, while expanding its coverage to include a wider range of bank liabilities.

We now expect USD/CNY to be near 6.68 by end-2017 and 6.48 by end-2018.

Fiscal policy will likely remain accommodative, with the focus shifting further towards improving income distribution and mobilizing “idle resources”. We expect the budget deficit ratio to stay flat at 3%, while local government bond net issuance may slow in 2018. Meanwhile, there will likely be a further step-up in transfer payments towards education, health care and poverty alleviation. SOE assets may start to be gradually transferred to the Social Security Fund, marking a significant milestone towards more efficient fiscal resource allocation.

On the reform front, we expect further progress to be made in boosting the quality and sustainability of growth, including improving income distribution, promoting urbanization, as well as continued efforts in  supply side reform and environmental protection.

We see the risks to our 2018 growth and inflation forecasts as balanced. The main macro & market uncertainties lay in more-hawkish-than-expected monetary policy setting domestically and abroad, as well as a sharper than expected property market correction. Meanwhile, we see upside risks in the CPI inflation trajectory, which results in a lower real interest rate and may lead to stronger-than-expected consumption and investment impulse.

The 2018 growth structure and policy mix may benefit mass consumption and manufacturing investment the most. We also expect a moderate steepening of the yield curve, stronger RMB, and a lower real interest rate to boost the profitability & attractiveness of the financial sector in general.