Bloomberg News

China’s Growth May Slip to 8.6% This Year As Europe Slows, Report Says

February 25, 2012

China’s economic growth may slip to 8.59 percent this year due to slowing in Europe, while inflation will ease to 3.3 percent, according to a Xiamen University and National University of Singapore joint forecast.

Growth may bottom out in the second quarter, slowing to 8.35 percent before picking up again, according to the forecast released today at a forum in Beijing. Expansion in first quarter may be 8.42 percent, down from 8.9 percent in the final three months of 2011.

China’s growth is decelerating as Europe’s sovereign-debt turmoil hurts exports and Premier Wen Jiabao continues trying to cool his nation’s property market. Last month’s decline in overseas sales and weaker-than-forecast lending raised concerns that the world’s second-biggest economy may see a sharper slowdown.

“There are many external uncertainties out there,” Wang Yida, a deputy director at the Ministry of Finance, said today at the forum. “We should be wary about the downward pressure on economic growth brought about by sluggish external demand, although the nation’s economic fundamentals remain sound.”

Wang said today the government will further improve the policy of “structural tax cuts” and boost spending in areas including energy conservation, education and technology to help spur domestic demand.

‘Fine-Tuning’

Wen said earlier this month that policy “fine-tuning” needs to start this quarter. The central bank announced a half- percentage-point reduction in banks’ reserve requirements on Feb. 18, the second cut in three months, to boost lending and sustain growth.

The central bank may cut interest rates in both second and third quarters, by 25 basis points each time, trimming the one- year benchmark lending rate to 6.06 percent, the forecast said.

China’s manufacturing may shrink for a fourth month in February, according to a preliminary reading of the purchasing managers’ index from HSBC Holdings Plc and Markit Economics released this week, adding to signs growth is weakening.

Gross domestic product expanded 9.2 percent last year, down from a 10.4 percent gain in 2010. Wen will target an expansion of less than 8 percent in his report to the National People’s Congress in Beijing on March 5, the equivalent of the U.S. President’s State of the Union address, according to eight of 15 economists surveyed by Bloomberg News this month.

Inflation to Ease

Inflation rebounded to a three-month high of 4.5 percent in January as a week-long holiday boosted spending and pushed up prices. Inflationary pressure will ease “significantly” this year as domestic economic growth moderates, the yuan continues to appreciate and external demand weakens, today’s forecast said. Inflation rose 5.4 percent from a year earlier in 2011, exceeding government’s target of 4 percent.

Pace of the yuan gains will decelerate this year as a narrowing trade surplus and slowing capital inflow ease pressure on yuan appreciation, the forecast said. China’s currency may trade at 6.23 to the U.S. dollar by the end of this year, it said.

The nation’s trade surplus is expected to continue narrowing this year as growth in imports will probably outpace that of exports, Zhang Yansheng, a researcher at China’s top economic planning agency, said at the same forum.

--Zheng Lifei. Editors: Scott Lanman, Jim McDonald

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net

Feb. 24 (Bloomberg) -- Kelvin Tay, chief investment strategist at UBS Wealth Management, talks about the outlook for the Chinese economy and equity markets. He speaks with Caroline Hyde on Bloomberg Television's "First Look." (Source: Bloomberg)

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