China third-quarter GDP growth seen at five-year low of 7.3 percent, more stimulus expected

[October 10, 2014]  By Kevin Yao

BEIJING (Reuters) - China's economy likely grew at its weakest pace in more than five years in the third quarter as a property downturn weighed on demand, a Reuters poll showed, raising the chances of more aggressive policy steps that may include cutting interest rates.

The economy may have expanded 7.3 percent in the third quarter from a year earlier - the weakest reading since the first quarter of 2009, when growth hit 6.6 percent during the height of the global crisis, according to a poll of 20 economists.

None of the economists believed Q3 growth will dip below 7 percent, although four penciled in 7.1 percent and one expected 7 percent.

The economy expanded by 7.5 percent in the second quarter and 7.4 percent in the first.

The government is due to release September data on trade, bank lending, investment and factory output in the coming weeks, leading up to third-quarter GDP on Oct. 21

"GDP growth is expected to slow to around 7.3 percent in the third quarter as property investment growth slides and manufacturing deflation worsens," Tang Jianwei, an economist at Bank of Communications, said in a note.

Softer domestic demand, linked largely to the cooling property market, probably pulled down growth in China's imports, investment and retail sales to multi-month or multi-year lows in September, a related poll showed.

Premier Li said on Wednesday that China will launch major investment projects in information networks, water conservancy and environmental protection this year, and pledged to policy adjustments made when needed.

But Li also made clear the government will tolerate growth slightly lower than the targeted 7.5 percent this year and rely more on reforms to generate new growth drivers.

MORE POLICY STEPS EXPECTED

The prospects of weaker growth may raise the chances of more aggressive policy steps such as cutting interest rates or reserve requirements across the board, but the government may not rush into action as the job market still appears to be holding up, analysts say.

Steps unveiled since April included reserve requirement cuts for selected banks and faster investment in railways and public housing. But much of their broader impact may have been offset by the cooling property market and tighter credit as banks grow more cautious about lending as the economy cools.

The central bank and banking regulator on Sept. 30 relaxed lending rules for home buyers, allowing banks to offer a maximum 30 percent discount to first time home buyers, a group which is being expanded to include those who already own one property but have paid off their existing mortgage.

But the impact of the move remains uncertain amid reports of huge inventories of unsold homes and state media reports that most banks are reluctant to offer big discounts on mortgages for fear of hurting their earnings.

"As we move into the fourth quarter, the base effect is expected to become slightly more favorable. This can support a path of modest expansion," Qu Hongbin, chief China economist at HSBC, said in a research report.

"However, given the lingering downside risks to growth and clear signs of a negative output gap, we think more easing measures are needed in the near term."

While, HSBC believed a rate cut remains an option toward the end of the year, others doubted the central bank will act soon.

"The possibility of cutting interest rates and RRR within the year is not big, unless there is a ugly turn," said Zhang Yiping, an economist at China Merchants Securities in Shenzhen.

LOWER LIMIT

It's hard to know where Beijing will draw the line in the sand for bolder policy action given the rapid expansion of the services sector, which creates more jobs than manufacturing.

Still, the government may have to step up policy support if quarterly growth slip below 7 percent, government economists at top think tanks involved in policy discussions said.

"There should be a lower limit. If (quarterly) growth slips below 7 percent, policy should be changed," said Zhang Yongjun, senior economist at China Centre for International Economic Exchanges, a well-connected think-tank in Beijing.

Top leaders have ruled out any massive stimulus as China struggles to deal with piles of local government debt, the hangover from a 4 trillion yuan ($652 billion) spending package implemented in 2008-09 to help cushion the country from the global financial crisis.

President Xi Jinping and Premier Li Keqiang are seeking to push reforms to put the world's second-largest economy on a more sustainable footing over the long term.
 

The government is likely to cut its annual growth target to around 7 percent in 2015, government economists said.

(Additional reporting by Koh Gui Qing in Beijing and Shaloo Shrivastava in Banglore; Editing by Kim Coghill)

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