Forecasting China's economic growth and inflation *

•M2 supply has played a crucial role in China's economic growth.•We provide a Bayesian VAR model that has a superior out-of-sample performance in forecasting real GDP growth.•The model can be used to provide policy projections under different policy scenarios.•A future GDP growth path will be of L-shape rather than U-shape.

Although macroeconomic forecasting forms an integral part of the policymaking process, there has been a serious lack of rigorous and systematic research in the evaluation of out-of-sample model-based forecasts of China's real GDP growth and CPI inflation. This paper fills this research gap by providing a replicable forecasting model that beats a host of other competing models when measured by root mean square errors, especially over long-run forecast horizons. The model is shown to be capable of predicting turning points and to be usable for policy analysis under different scenarios. We find that M2 supply, rather than interest rates, is a key variable for forecasting macroeconomic variables. Annual GDP growth for the next five years is predicted to be close to the 6.5% official target and a future GDP growth path is predicted to be of L-shape rather than U-shape.