China: MONKEY forces the Year of the Monkey

Markets: Financial market volat ility w ill remain elevated ref lecting

an unbalanced rebalancing. GDP grow th will decelerate further to

+6.5% in 2016 and to +6.4% in 2017 and volatility w ill increase.

Ownership: Policymakers are likely to step up easing measures

w ith a rise in the def icit target (-3.5% of GDP f rom -2.3%), eased

monetary policy (-50bps policy rate cut, -100bps for Reserve

Requirement Rat ios) and low er renminbi (6.8-7 RMB for 1 USD).

Clearer choices and communication w ill be provided to reassure

the private sector.

Non-payment: In 2016, insolvencies w ill increase by +20% and

DSO to 84 days. Corporate debt is high (160% of GDP) and

gearing w ill increase for industrial sectors (heavy machinery,

construction and commodities) w hile sectors related to consumer

demand (food), high end (computer) and subject to government

targets (aeronaut ics, automot ive) could experience more limited

credit risks.

Kapital expenditure i.e. investment: Company prof its are expected

to stabilize af ter -2% in 2015 on the back of modest sales

volumes, deflationary pressures and tepid external demand.

Investment growth will be below +5% in real terms for the first time

in 25 years. Ongoing deleveraging, capital flight and lower FDI will

limit investment financing.

Exports black hole: China has been on a trade roller-coaster for

the past year with limited export revenues in USD terms and

causing major disruption to its t ier 1 suppliers of raw mater ials

(Malaysia, Lat in America, Middle East and Af rica) and to partner

hubs (Singapore, Hong Kong and Taiw an). Solace could come in

the form of a massive mercantilist move (One Belt One Road).

Yuan: Downward pressures are increasing including a w eaker

export performance, tighter monetary policy in the U.S. and high

deflationary pressures. In the short-run, competitiveness gains

would be largely offset by another miscommunicated depreciation.