Stung by debt, China's economic growth to slow to 6.5% in 2017


  • Business
  • Thursday, 20 Apr 2017

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BEIJING: China's economic growth is seen slowing to 6.5% in 2017 despite a strong start to the first quarter, as the government seeks to cool the property sector and temper credit growth to contain risks from a dangerous build-up of debt, a Reuters poll showed.

Growth is expected to weaken further to 6.2% in 2018, the Reuters poll of over 75 economists showed, extending a slowing trajectory for the world's second-biggest economy which grew 6.7% in 2016 for its worst performance in 26 years.

The forecasts for this year and in 2018 were unchanged from a January poll, even after stronger than expected first quarter growth of 6.9%, underscoring the drag on the economy from property controls and tighter credit.

The solid first quarter was boosted by higher government infrastructure spending and a gravity-defying property boom which helped boost industrial output by the most in over two years.

But as Beijing looks to put the economy on a more balanced and sustainable footing, growth is seen losing steam later this year on the back of more property cooling measures and central bank steps to raise funding costs to defuse bubble risks.

On a quarterly basis, China's economy is expected to slow to 6.7% growth in the second quarter, 6.6% in the third and 6.5% in fourth quarter, the poll showed.

The government is targeting annual growth of around 6.5% this year.

The International Monetary Fund on Tuesday raised its forecasts for China's 2017 growth to 6.6% from the previous 6.5% and raised 2018 growth to 6.2% from 6.0%, but warned of potential disruptions in the medium term unless the country reduces its reliance on rapid credit growth.

China's debt-to-GDP ratio rose to 277% at the end of 2016 from 254% the previous year, with an increasing share of new credit being used to pay debt servicing costs, according to an estimate from UBS.

Analysts also expect annual inflation to average 2.1% in 2017 and 2.3% in 2018, up from 2% in 2016.

Sluggish demand is expected to keep consumer prices largely in check despite a big bump in producer prices.

TIGHTENING BIAS

Stronger global demand and China's bid to keep the economy on an even keel could support growth ahead of a major leadership transition later this year.

The People's Bank of China (PBoC) is trying to put the brakes on flush credit by guiding short-term interest rates higher, but it's expected to keep benchmark interest rates steady and may even loosen credit conditions if growth falters.

Higher domestic borrowing costs could also support the yuan, especially if US interest rates continue to rise, which could risk a resurgence in capital outflows from China.

The yuan has stabilised this year, due to curbs on capital outflows and a reversal of the dollar rally, following a fall of 6.5% in 2016. Currency strategists polled by Reuters earlier this month predicted it would weaken to 7.05 in six months and fall further to 7.10 in a year.

Analysts believe the PBoC will keep benchmark lending rates unchanged at 4.35% through at least the third quarter of 2018, the Reuters poll showed.

They have pushed back their expectations on a cut in the amount of cash that banks are required hold as reserves, or the reserve requirement ratio (RRR).

The central bank is expected to cut the RRR by 50 basis points (bps) in the fourth quarter this year to 16.5%, according to the poll.

The January poll had predicted a 50 bps cut in RRR in the third quarter of this year.

Fan Gang, an adviser to China's central bank, has said that cuts in the RRR would be normal given sharp drops in its foreign exchange reserves. - Reuters
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