China central bank holds line on growth forecast but sees more pain to come

SHANGHAI (Reuters) - China's central bank slashed its forecast for exports on Wednesday, predicting a second straight annual fall in shipments, but said the economy will still grow 6.8 percent this year.

The People's Bank of China (PBOC) also warned in its mid-year work report that the government's push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds.

And, ahead of a meeting of the U.S. Federal Reserve's policymaking board next week, it said the pace of U.S interest rate rises would affect global capital flows and emerging market currencies, but it did not mention the yuan.

"Since the beginning of this year, the global and domestic economic environment has experienced a number of changes," the PBOC said in the report.

"Reflecting these recent developments, we revised our China macroeconomic forecasts for 2016. Compared with our published forecasts in December last year, we maintain our baseline projection of 2016 real GDP growth at 6.8 percent."

The report was released shortly after monthly data showed China's exports fell an annual 4.1 percent in May, more than expected and the 10th decline in the past 12 months.

Imports were more encouraging, declining only marginally and much less than expected, pointing to improving domestic demand and adding to views that the economy may be slowly stabilising. Preliminary commodity trade data showed sharp rises in imports of copper and iron ores.

However, some economists cautioned that imports from Hong Kong may have once again been inflated by fake trade invoicing to disguise speculation on the yuan, which came under renewed depreciation pressure last month as the U.S. dollar surged.

Chinese customs data showed the mainland's imports from Hong Kong jumped 242.6 percent in May from a year earlier, while its exports to the territory fell 7 percent.

"We don't expect the trade figure will change the PBOC's attitude towards the (yuan) exchange rate. They still prefer stability," wrote ANZ economists in a research note.

The yuan has eased this week after disappointing U.S. jobs data saw markets pare back expectations of a U.S. rate rise.

U.S. officials have been in China this week pressing China to reduce trade barriers for foreign businesses, and also expressing concern that Chinese firms in glutted sectors like steel are dumping underpriced goods in offshore markets.

Those concerns are unlikely to be relieved by the May trade data, as steel and rare earth exports continued to rise.

MORE GROWTH

Despite cutting its forecast for exports to minus 1 percent from growth of 3.1 percent, the PBOC saw a domestic recovery remaining on track.

It upgraded its forecast for fixed-asset investment growth to 11 percent, an increase of 0.2 percentage points from estimates it made late last year.

A government spending spree on major infrastructure projects and a continuing recovery in the housing market have boosted demand for materials from cement to steel.

China's trade shrank 8 percent last year, compared with the government's goal for 6 percent growth, in the worst performance since the global financial crisis.

The PBOC also said it expected consumer price inflation to pick up to 2.4 percent this year, 0.7 percentage points higher than its earlier forecast and signalling that worrying deflationary pressures seen in 2015 were easing.

Indicators from the consumer, investment and factory sectors have suggested the prolonged slowdown in the world's second-largest economy may be bottoming out, and many analysts no longer expect much in the way of aggressive policy easing going forward, given concerns about rising levels of bad debt.

(Reporting by John Ruwitch, Laura Lin and Lu Jianxin; Writing by Pete Sweeney; Editing by Jacqueline Wong and Kim Coghill)