DRIVING FORCE

Reforms may help rev up economic growth

We should not underestimate the senior leadership’s desire to contain financial leverage and risks, efforts on which have only just begun, even if they may lead to slower credit and economic growth.” Wang Tao, a UBS economist

BEIJING — Economic growth may slow as China continues moves to contain debt and financial risks.

But a steep decline is unlikely due to a buttressing effect from reforms and burgeoning new growth drivers.

Fresh data showed that despite an overall picture of stabilizing growth, signs of weakening momentum have emerged in the economy.

This has stoked concerns the rebound has lost steam and the economy may face a hard landing.

The official purchasing managers’ index for the manufacturing sector, released last week by the National Bureau of Statistics, was 51.2 in May and flat with the reading in April, which was the lowest since October.

Still, the index has remained above the 50-point mark, which separates expansion from contraction, for the 10th straight month.

The official service PMI continued fast growth, rising to 54.5 in May from 54 in April — evidence of a better economic structure.

China has been striving to shift its economy toward a growth model that draws strength from consumption, the service sector and innovation. Last year, the service sector accounted for more than half of the Chinese economy.

Yet a private survey of smaller manufacturers showed last week that the sector had fallen below 50 last month for the first time in 11 months. The Caixin manufacturing PMI came in at 49.6 in May, down from 50.3 in April.

China’s manufacturing sector had “come under greater pressure” in May, said Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin Insight Group.

Zhong believes the economy is on a downward trajectory.

Wang Tao, a UBS economist, expected other May data to show marginally slower industrial production growth, cooler export demand and consumer inflation picking up.

Slower credit growth due to China’s ongoing supervisory tightening could lead to weaker fixed-asset investment and activities later in the year.

“Softening property sales amid policy tightening may also weigh on construction by the end of the year ,” said Wang, who expected China’s GDP growth to slow to 6.5 percent in the fourth quarter.

That forecast was in line with the Chinese Academy of Social Sciences, a government think tank. CASS expects the economy to grow 6.7 percent and 6.6 percent in the second and third quarter, respectively.

GDP expanded 6.9 percent in the first quarter of the year, up from the 6.8 percent in the previous quarter and 6.7 percent for 2016.

The government has targeted annual growth of around 6.5 percent this year.

Since the end of last year, Chinese authorities have tightened financial regulation and credit control and have been using an expanded monetary policy tool-kit to deleverage without destabilizing growth.

This followed surging housing prices in major Chinese cities and investment booms in financial markets, ranging from stocks and bonds to farm produce futures.

As the trend continued, this made policy makers wary of debt piling up in corporations, local governments and households.

The government pledged to make a priority of preventing financial risks this year.

Measures have been unveiled to step up risk scrutiny in banking, targeting nonperforming assets, shadow banking, regulatory arbitrage and other malpractice.

“We should not underestimate the senior leadership’s desire to contain financial leverage and risks, efforts on which have only just begun, even if they may lead to slower credit and economic growth,” said Wang of UBS.

Even so, the government will try to strike a delicate balance between deleveraging and stabilizing growth.

Elena Duggar, an associate managing director at Moody’s, expected GDP growth to slow to 6.6 percent this year.

She said the policies target limiting the growth of debt, rather than bringing about rapid deleveraging that could be destabilizing.

“The risk of disorderly deceleration of growth in China is limited,” said Duggar.

China has been pressing ahead with economic restructuring and supply-side reform, which analysts said have yielded outcomes and will ensure sustainable economic growth.

Consumption contributed to 77.2 percent of economic growth in the first quarter, up from 64.6 percent during the same period last year.