MNI: Goldman Sachs Expects Softer Growth In China On Reforms

--Predicts GDP To Ease To 6.5% in 2018

--Sees CPI Rising To 2.3% From 1.5%

--Expects Yuan To Weaken To 6.8 On Average

     BEIJING (MNI) - China's economic growth rate is likely to slow to a more

modest 6.5% in 2018 as the world's second-largest economy continues to push

forward reforms in a bid to contain risks and reduce negative external factors

amid past rapid growth, investment bank Goldman Sachs said Wednesday.

     China's economy has had an unexpectedly strong performance this year with

an average growth of 6.9% in the first three quarters, and it is widely expected

that the whole year's GDP will exceed last year's 6.7% growth rate, meaning the

country would have its first rebound in economic growth since 2010. China's

government has set a growth target for the year of about 6.5%.

     "There are strong upward drivers for economic growth this year, despite

being dragged by tighter regulations" over the property market, infrastructure

spending, environmental protection and shadow banking, Yu Song, chief China

economist at Goldman Sachs/Gao Hua Securities, told journalists Wednesday in

Beijing. "Actually, the economy has slowed from its actual growth capacity as

the government is actively slowing the pace to control risks."

     Song said growth was being supported in part by newly appointed local

official becoming more proactive in "investment implementation," and also

attributed it to better overall economic management. In addition, sectors like

coal and steel, which suffered significant losses in past years, have now begun

making profits as capacity in those sectors is being reduced and poorly

performing firms are being phased out, with more bank lending targeting the

sectors.

     For next year, Goldman Sachs thinks the "policy put" on growth remains in

place but will be "restruck incrementally lower." Investment is expected to

slow, particularly in the infrastructure and property sectors.

     In contract, private investment should pick up slightly, particularly in

the manufacturing sector, considering China's strong exports and "capex

discipline" in recent years, the investment bank said in a research note.

     "Should it be necessary, we think stretching out the timetable of

[regulatory] tightening would be preferred to a substantial growth slowdown,"

Song said.

     Goldman Sachs also said it expects inflation to move higher to 2.3% from

1.5% this year based on higher food prices and a lower comparison base.

     As for the yuan exchange rate next year, Song said policymakers would

tolerate some modest depreciation of the yuan to help support export growth and

overall economic activities, meaning the yuan would be about 6.8 against the

U.S. dollar on average for the year, especially with capital outflows remaining

constant due to the "diversification needs" of overseas investments.

     The biggest uncertainty for the economy may be the desired speed of the

transition from an orientation toward high growth to one of sustainable growth

and risk management, Song said. "The pace of the transition is not fixed. The

government has been fine-tuning it and will continue to do so to achieve the

multiple economic and social goals," he said.

     "Risks are skewed toward a weaker outcome on growth if senior leaders are

determined to move quickly or if particularly hawkish appointment are made to

key economic posts," Song noted. "More specifically, the possibility of

off-balance sheet fiscal overtightening remains a key downside risk."

     "There are risks to the 6.5% growth forecast in both directions. Downside

risk is from more rapid moves by senior leaders to reduce pollution and

financial risks, and the appointments of particularly hawkish policymakers, and

vice versa," Song noted.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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