Vanguard Economic and Market Outlook for 2018 (Part two)

Part one of this paper, from the previous week, discussed Vanguard's global economic and growth outlooks, as well their perspective on Australia and the United States.


Following a decade of aggressive credit expansion, China's credit profile has stabilised recently, as tighter financial controls and a rebound in nominal growth helped stunt a rise in corporate liabilities-the crux of China's debt fears. Although this bodes well for China's medium-term goal of maintaining financial stability, we are conscious of the negative impact it will have on growth in the near term. Alongside tighter property regulations and supply-side adjustments, the financial tightening is likely to cause China to decelerate modestly in 2018, reaching about 6.0%-6.5%.

Nonetheless, the chance of a significant deceleration in the near term-that is, a hard-landing scenario- is low for several reasons.

First, the oversupply and overcapacity drags in the real estate and heavy industrial sectors, which have weighed on China's investment growth for years, are likely to be less intense going forward. In the property market, for example, a combination of strong demand and a sharp contraction in investment from the middle of 2013 to 2015 has reduced the extent of inventory overhang (see Figure 18a). Additionally, it appears that the peak of the industrial capacity reduction is behind us.

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