A modest cyclical bounce, following the deep the second quarter, we expect policy to switch downturn in 2022, suggests that a negative to a more neutral stance. In addition, the output gap is likely to persist toward the end depreciation in the renminbi in the second half of next year even in our upside scenario, with of 2022 is a reminder that Chinese policymakers the normalization in consumption and services have limited space to stimulate, as further and continuing to lag behind that of production. more aggressive easing may lead to capital Such an incomplete and uneven recovery of the outflows and higher inflation. The currency is economy would keep consumer inflation subdued. likely to remain under pressure in 2023 as We expect headline CPI to average 2.2% in 2023, developed-market central banks continue raising with core inflation below 1%. As such, the People’s interest rates in efforts to curb inflation, though Bank of China is likely to continue with modest the improved growth outlook in China and the liquidity easing and interest rate cuts in the near interventions by the People’s Bank of China to term, bucking the global trend. Nonetheless, we prevent panic about financial stability could help also believe that policymakers will refrain from stabilize the renminbi down the road. Our fair- overstimulating the housing market and the value model (Figure I-26) suggests that the broader economy in 2023, given concerns about renminbi is now close to fair value based on ever-rising leverage and financial stability risks. fundamentals. In fact, once the economy starts to rebound in FIGURE I-26 Our fair-value model is showing the renminbi fairly valued at current levels  e t a t r Fair-value range o p  Spot rate D s S Fair value U / Y N  C              Sources: Vanguard calculations, based on data from DataStream, as of October 31, 2022. 32