Battle against debt to slow China's Q2 GDP growth to 6.8%

Weaning China off its dependence on yrs of cheap money may pose threat if not handled well: Experts

China's economic growth is expected to have cooled to 6.8 per cent in the second quarter (Q) as Beijing tightens the screws on financial risks, a Reuters poll showed, in a sign the world's second-biggest economy is set for a further slowdown over the coming quarters.

The survey of 60 economists suggested government efforts to flush out property speculators, defuse asset bubbles and reduce high levels of debt across the economy will continue to chip away at growth from Q1's robust pace of 6.9 per cent.

While policymakers are treading cautiously ahead of a key party meeting later this year, analysts say that weaning China off its dependence on years of cheap money may pose a threat to the economy if not handled well — especially as rising borrowing costs risk depressing investment and confidence.

Just the same, the broad consensus is that the economy is entering a period of a gradual deceleration rather than a sharp downturn. And, solid exports could help cushion the impact from the deleveraging drive, economists said.

"The economy could slow due to combined effects of property controls and the develeraging push, but we don't expect a significant slowdown as exports improve," said Tang Jianwei, senior economist at Bank of Communications in Shanghai.

A surprisingly upbeat gross domestic product reading would likely lift stocks and global commodity prices, but a weak outcome could boost bearish bests on the yuan, which has gained about 2 per cent against the dollar so far this year.

Economists in the poll estimated gross domestic product (GDP) grew 1.7 per cent q-o-q, versus 1.3 pe rcent in Q1, though only 17 analysts gave sequential forecasts.

Q1 growth of 6.9 per cent was the fastest in 6 quarters, driven by strong government infrastructure spending and a gravity-defying property boom.

Investment risk

In an environment of tightening financial conditions, economists say investment — a vital growth engine — may take a hit and put the brakes on growth.

Zhu Baoliang, chief economist at the State Information Centre, a government think-tank, told the official Financial News this week that he expected China's growth to slow to 6.6 per cent in the third quarter and 6.4 per cent in the fourth.

Still, Zhu tipped the economy to grow 6.7 per cent this year, ahead of the government's target of around 6.5 per cent.

Moody's Investors Service downgraded its credit rating in May, saying it expects the country's financial strength will erode in coming years as growth slows and debt continues to rise.

China will release Q2 GDP data on July 17, along with June industrial output, retail sales and fixed asset investment.

June trade figures will be issued on Thursday, with exports seen up 8.7 per cent last month from a year earlier — matching that of May, according to a separate Reuters poll.

Tightening conditions

The People's Bank of China (PBOC) shifted to a modest tightening bias at the start of this year, guiding market interest rates higher during the first quarter, including immediately after the US Federal Reserve raised rates in March.

But the PBOC injected substantial liquidity last month to help avoid an end-quarter cash crunch as Beijing tightened regulations to force banks to delevergae.

Indeed, policy insiders expect the central bank to hold off on further tightening and could even slightly loosen its grip in the coming months to support growth.

"We've pencilled in cooling growth in Chinese demand over the second half of the year," said Qu Hongbin, HSBC chief economist for China.

"Much depends, however, on how hard China's central bank will keep pressing the brakes: it seems unlikely it'll want to derail growth entirely."