Research Team at Danske Bank, notes that the Chinese economy slowed to 6.8% y/y in Q4 driven by weaker activity in the industry and construction sector. Key Quotes “The service sector grew robustly above 10%. Chinese activity has been hurt by weak foreign demand and a sharp slowing in the construction sector due to a big oversupply of houses. Meanwhile, private consumption has continued to grow at a decent clip of around 8% y/y. Looking ahead, we see tentative signs of a gradual recovery in the construction sector as home sales have been boosted by stimulus measures and housing oversupply is gradually coming down. Infrastructure investment is supported by fiscal stimulus and consumption and service sector growth is expected to remain strong. The Chinese government’s growth target for 2016 is 6½-7%. Our forecast for GDP growth is 6.7% and 6.6% for 2016 and 2017. China is facing several challenges from a strong increase in debt over the past few years. Non-performing loans are on the rise – partly related to the sharp slowdown in construction hitting developers and the steel and cement industry. China will need to slow down the build-up of debt sooner or later, but for now we believe the government has the tools to deal with the debt and recapitalisation of the banks should avoid a banking crisis. As construction recovers, the rise in non-performing loans should stabilise. China still has a big current account surplus of 3% of GDP and is still gaining market shares in global export markets. Monetary policy outlook The People’s Bank of China (PBoC) currently has a clear easing bias and cut the reserve requirement ratio (RRR) in Q1 by 50bp. We look for a further decline of the RRR of 50-100bp this year and additional rate cuts of 50bp over the next six months. The lower interest rates will give further stimulus to housing and ease the burden on companies. FX outlook China saw significant CNY selling pressure in January but managed to stabilise outflows by pushing up offshore (CNH) money market rates through intervention. Since then markets have calmed down. We do not believe China will devalue as the markets have feared. Instead, we expect a continued gradual weakening versus the USD as China eases further and the Fed raises rates. We look for a gradual weakening towards 6.85 +12M versus the USD, a depreciation of around 5%.” For more information, read our latest forex news.