China’s battle against debt to slow Q2 growth

BEIJING: China’s economic growth is expected to have cooled to 6.8% in the second quarter (Q2) 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 the first quarter’s robust pace of 6.9%.

While policymakers are treading cautiously ahead of a key party meeting later this year, analysts say that weaning China off its depend- ence 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% against the US dollar so far this year.

Economists in the poll estimated GDP grew 1.7% quarter-on-quarter, versus 1.3% in the first quarter, though only 17 analysts gave sequential forecasts.

The first-quarter growth of 6.9% was the fastest in six quarters, driven by strong government infrastructure spending and a gravity-defying property boom.

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% in the third quarter and 6.4% in the fourth.

Still, Zhu tipped the economy to grow 6.7% this year, ahead of the government’s target of around 6.5%.

Moody’s Investors Service downgraded its credit rating in May, saying it expected the country’s financial strength would erode in coming years as growth slowed and debt continued to rise.