• China’s economic performance has been excellent in the past few years and the EPI grades its current economic performance at A level.
• The EPI score is projected to be close to 97.6% in 2016, an A grade.
• China is transitioning to a “new normal” growth model, with lower yet more sustainable growth rates of the economy and credit.
• The 5-Minute Economist projects China’s EPI score to gradually decelerate in the medium term.

China’s “hard landing” remains a risk but the government’s monetary and fiscal stimuli are likely to ensure that the slowdown is gradual. Lower growth would eventually lead to lower corporate profits and lower dividends, negatively affecting stock prices. The stock market crash in the second half of 2015 was a reason for investors to re-price the growth potential of the Chinese economy.

GDP growth is projected to decelerate to 6.5% in 2016 after peaking at 10.6% in 2010 due to slower investment, especially in real estate. The labor market has remained resilient despite slower growth, as the economy pivots toward the more labor-intensive service sector. The official unemployment rate is likely to remain flat at 4.1%, despite the economic slowdown. Fiscal policy has been accommodative and continues to be impacted by off-budget activity, with the budget deficit projected to increase to 3.1% of GDP this year from 2.7% in 2015. Inflation is projected to be 1.8% this year, on the back of lower commodity prices.

The 5-Minute Economist projects China’s EPI score to gradually decelerate in the medium term from 98.7%, or A level currently, to 96.7%, still a solid A level, by 2021. The major drivers for the slowdown in the EPI score in the medium term are projected to be lower GDP growth, which is projected to stabilize at 6% by 2021, and some acceleration in inflation to 3%. Changes in the unemployment rate are unlikely, and the budget deficit is likely to stay close to 2.2% a year.