China's path of growth slowdown as rebalancing continues

Investment growth is expected to decelerate further in the next two years, but likely at a slower pace than before. Meanwhile, consumption growth will likely stabilize at lower levels, on the back of relatively firm growth in household income. In addition, the slight pickup in external demand offers hope for export growth to return to positive territory in 2015 and 2016. 

"We keep our real GDP growth forecasts for 2015 at 6.9% yoy and 6.6% yoy for 2016, and roll out our2017 GDP growth forecast as 6.5% yoy", says BofA Merrill Lynch.

As China transitions from an investment-oriented and manufacturing-heavy economy to a consumption-driven and service-led economy, a gradual increase is expected in the share of tertiary (service) sector in overall GDP. That said, the expansion of the service sector will unlikely fully offset the drag from weak investment and manufacturing sector growth, leading to a further slowdown in headline GDP growth. Meanwhile, domestic demand will remain the key driver for growth, with the current account contribution hovering at approximately 3% of GDP. 

Meanwhile, it is believed that weak aggregate demand will continue to keep a lid on inflationary pressure in the system, including in food prices. More than three years of PPI deflation serves as both a telltale sign of weaker industrial activities and a high hurdle to reboot upstream growth. 

"We nudge our CPI inflation forecasts down to 1.5% yoy from 1.6% yoy for 2015, to 1.6% yoy from 1.8% yoy for 2016. For 2017, our CPI inflation forecast is 1.2% yoy", added BofA Merrill Lynch.