From a UBS Golbal research note on China outlook for 2015

In summary:

Key Themes and Big Surprises in 2015:

  • 2014 started bumpy but ended on a positive note for China – serious concerns on slowing growth and financial risks faded as the government adopted policies to stabilize the economy and financial conditions
  • For 2015, we expect a slow grind with further policy easing, stable financial conditions, improving corporate margins and intensified reform effort
  • However, there could be some big surprises as well

They go on:

  • We expect China’s GDP growth to slow further in 2015 to 6.8%
  • Ongoing property downturn leads to further weakness in construction and industrial production, and related investment
  • Tepid domestic demand and falling commodity and energy prices are expected to bring CPI inflation down to 1.5% while producer prices decline further
  • We believe rising deflationary pressure will spur the central bank to cut benchmark lending rates by at least 50 bps in 2015
  • Local government bond issuance will further help lower financing costs and alleviate debt service burden
  • Decline in commodity and energy costs as well as reduction in borrowing costs should help improve corporate margins

PBOC is expected to adopt an easing bias to keep monetary policy “appropriate”

  • including using various liquidity facilities and RRR cuts to offset drainage from FX outflows and keep interbank rates low
  • Easing various lending restrictions to keep credit growth stable – but to refrain from major liquidity or credit expansion
  • We expect the RMB to depreciate only modestly against the USD (6.35 by end 2015)

What could surprise in 2015?

  • Lower interest rates, expected further policy easing, and an improvement in market sentiment may lead to a surprisingly early end to China’s property sector adjustment, and a rebound in property construction … would lead to better-than-expected GDP growth and stronger commodity prices, but could reignite concerns about structural imbalances and bring an end to the easing bias on monetary policy
  • Our baseline view is that the government will manage liquidity conditions adequately and chances of systematic financial problems are very small… but risk is that unexpected large capital outflows, inadequate liquidity provisioning, deteriorating corporate balance sheet and a breakout of shadow credit defaults may trigger heightened financial distress among corporate and small financial institutions, generating a negative surprise for the market
  • The market is pessimistic about the progress on both debt restructuring and PPP, and concerned about serious weakness in infrastructure spending in 2015. The surprise, therefore, would be that local debt restructuring takes place quicker than expected
  • Most people in the market expect the PBC to continue using a combination of various liquidity facilities to manage the base money supply, and at least one reserve requirement ratio cut. It would be a surprise, therefore, if the central bank either changes tactic or is forced by unexpected large capital outflows to rely more or exclusively on RRR cuts to manage liquidity. In the latter case, the PBC may have to cut the RRR by over 150 basis points… It would also be a surprise if the PBC kept both interest rates and RRR unchanged throughout 2015, either because of stronger property and real economic activities or to strengthen incentives for structural adjustment