IMF cuts China growth outlook, urges cap on social financing

Wed May 29, 2013 4:56am EDT
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BEIJING (Reuters) - The International Monetary Fund cut its growth forecast for China this year to 7.75 percent from 8 percent, citing a weak world economy and exports, adding to concerns that the world's second-largest economy is losing momentum.

The IMF move follows a series of lowered 2013 growth estimates for China by private economists after soft factory output and investment performance data for April and weak factory activity in May.

The IMF's forecast is above the government's target of 7.5 percent, but in line with recent revisions, including Bank of America-Merrill Lynch, which pared its forecast this month to 7.6 percent from 8 percent, and Standard Chartered, which cut its estimate to 7.7 percent from 8.3 percent.

ING last month reduced its prediction to 7.8 percent from 9 percent.

"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," David Lipton, the first managing director of the IMF, told a media briefing.

The IMF said China's priority should be on reining in social financing growth, which has expanded at double-digit rates in recent months, leading to concerns that the country's fast credit supply may fuel inflation in future.

"China's economy faces important challenges. In particular, the rapid growth in total social financing raises concern concerns about the quality of investment and its impact on repayment capacity," said Lipton.

"If growth were to slow sharply below this year's target, then on-budget fiscal stimulus should be used, focusing on measures that support household incomes and consumption, such as reductions in social contributions, subsidies to consumption, or targeted social safety net spending," Lipton said.

Unlike previous years when any wobble in the Chinese growth engine was countered with heavy government intervention to stabilize activity, the market consensus this time is no big-bang stimulus as policymakers have more tolerance of a slow economic growth speed to improve economic quality.   Continued...

A Chinese national flag flies as workers clean the windows of the headquarters of the People's Bank of China, the country's central bank, in Beijing October 10, 2012. REUTERS/Barry Huang