IMF Lowers China Growth Forecast to 7.75%, Issues Warning on Debt

May 29, 2013Chinaby EW News Desk Team

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The International Monetary Fund has lowered the growth forecast for China for the second time in just six weeks, saying it expects growth to reach “around 7.75 percent” this year. The Washington-based institution also warned that Beijing needs to make a “decisive push” to launch new market-oriented reforms and raised concerns about a rapid expansion of credit in the world’s second largest economy.

The IMF cut follows a series of lowered 2013 growth estimates for China by private economists after data revealed weak factory output and investment performance data for April.

Earlier this month, Bank of America Merrill Lynch pared its China growth forecast to 7.6 percent from 8 percent, while Standard Chartered cut its estimate to 7.7 percent from 8.3 percent.

China's economy grew 7.8 percent in 2012 – its slowest pace in 13 years – and registered a surprisingly weak 7.7 percent expansion in the first three months of this year, well below forecasts.

“The pace of [growth in] the economy should pick up moderately in the second half of the year, as credit expansion gains traction in line with a projected mild pick-up in the global economy,” said David Lipton, the first managing director of the IMF, at a media briefing in Beijing on Wednesday.

The lowered outlook, Lipton explained, comes “essentially from looking at the global economy and the pace of growth in the global economy and the demand that derives from that growth for Chinese exports", and recommends China conduct fiscal stimulus if growth falls below the IMF forecast.

Lipton added that China needs a “decisive push for rebalancing toward higher household incomes and consumption,” a shift that would nurture “more balanced” and “inclusive” growth.

"They need continued liberalisation and reduced government involvement [in the economy], allowing a greater role for market forces," he said.

Related: Fixing China’s Economic Imbalances: Michael Pettis

A key hurdle for reformers will be potential resistance within the ruling Communist party to changes that might hurt revenues for politically favoured state companies that dominate industries including banking, telecommunications, shipping and energy.

While it would require “strong determination” and political willpower, “allowing more competition in sectors currently considered strategic would improve economic growth," said Lipton.

Related: China Sets 10% Profit Target For State Firms After Weaker-Than-Expected Q1 Results

The Fund also cautioned about China's rising debt levels and a surge in credit, which has helped to drive its economic rebound but could be ploughed into inefficient uses if it isn't properly managed.

Private sector analysts estimate "total social financing" – the sum for credit from both the state-owned banking industry and informal private sources – rose 58 percent in the first quarter over a year earlier.

The IMF said China’s priority should be on reining in credit growth, which increased the risk that some investments might be of poor quality and borrowers might default.

"Growth has become more dependent – perhaps too dependent – on the continued expansion of investment. Reining in total social financing and its growth is a priority,” he said.

Related: China’s Local Government Debt Is “Out Of Control”, Warns Auditor

Related: China Pressuring World Bank Into Watering Down Key Report: FT

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