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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
[TOPICS: M$A$$$,M$Q$$$,MT$$$$]

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