China Macro Outlook 26H2-2027: Approaching Inflection

Challenging 2026, More Challenging 2027: The domestic economy is on the verge of recession, but headline growth should still meet target this year, supported by investment-led cyclical stabilization ahead. The government may be pressed to "protect 4" in 2027 amid headwinds: [1] export engine slows down; [2] property deepens as a drag; and [3] entrenched weak confidence turns to faster deleveraging. We forecast GDP growth slowing from 4.6% in 2026E to 4.1% in 2027E, and PPI inflation falling from 2.8% to 0.4%. A "9.24"-style policy pivot looks inevitable in 2027, with the augmented fiscal deficit to increase ~RMB2trn and two 10bp policy rate cuts. The dominant theme for China investing has shifted from consumption upgrade to tech upgrade, with China potentially becoming a major global center for the "AI+ economy". China rates are set to stay lower for longer, with managed RMB appreciation toward 6.5 per US dollar in 2027E.