China’s Economic Growth Projected to Slow to 6.5 Percent in 2016 Despite Policy Support, According to Reuters

By Elias Glenn

BEIJING (Reuters) – China’s economic growth is anticipated to decelerate to 6.5 percent this year, which is at the lower end of the government’s target range. This projection comes amidst increased government spending and a further relaxation of monetary policy by the central bank, all aimed at averting a more drastic slowdown, according to a recent Reuters poll.

The world’s second-largest economy continues to experience significant pressure from weak export performance and substantial industrial overcapacity. Policymakers are under heightened scrutiny as they strive to sustain job growth while managing the risks associated with rising debt levels in China.

Nomura economists highlighted ongoing structural issues, including an oversupply of real estate and industrial overcapacity. They cautioned that any investment stimulus from the government is unlikely to be sustainable, predicting that economic growth will eventually decline.

In a survey of 60 economists conducted over the past week, the median forecast remains at 6.5 percent for 2016, marking the slowest growth rate in 25 years, with expectations of a further decline to 6.3 percent in 2017 as momentum in the housing recovery seen earlier this year wanes.

The range of GDP forecasts from the survey varied significantly, with the highest estimate at 6.8 percent and the lowest at 6.0 percent. The government has set a growth target of between 6.5 and 7 percent for the year, following a 6.9 percent expansion in 2015.

According to the National Bureau of Statistics, China’s economy grew by 6.7 percent in the second quarter, slightly exceeding expectations and remaining stable compared to the first quarter.

While concerns about a sharp economic downfall have subsided, private sector investment growth has hit record lows, increasing reliance on government intervention. Analysts worry that a continued emphasis on state-driven growth could create a "vicious cycle" of inefficiency and declining growth potential.

The real estate sector, which has recently provided a much-needed boost to the economy by increasing demand for construction materials, showed signs of fatigue in June, with a slowdown in real estate investment growth for the second consecutive month. Property price increases also decelerated in various cities during June, indicating that the current housing cycle may be nearing its peak.

The central bank has refrained from further interest rate cuts since October. An authoritative source quoted in a government newspaper mentioned in May that excessive reliance on debt-driven stimulus could lead to a potential financial crisis and recession.

Nonetheless, economists anticipate that a further slowdown may prompt the People’s Bank of China (PBOC) to lower the benchmark interest rate by 25 basis points by the first quarter of 2017. They also expect the PBOC to reduce the reserve requirement ratio (RRR) for banks by an additional 75 basis points by the end of 2016.

In April, economists had predicted a 25 basis point rate cut and a total of 150 basis points in RRR reductions for the year. The central bank has already cut lending rates six times since November 2014, bringing them to 4.35 percent, and has lowered the RRR to 17 percent.

Analysts project that annual inflation will average around 2 percent for 2016 and 2017, highlighting the sluggish outlook for economic growth. Inflation stood at 1.9 percent in the first half of 2016.