China's economy to slow significantly, say observers

China's economic growth will slow significantly in the second half of 2010 and the downturn will continue in the first quarter next year during which gross domestic product (GDP) growth may decrease to as low as 7.5%, said analysts at Neuberger Berman at a press briefing in Hong Kong on Friday.

"China's economy started to decline in the second quarter and, while the overall growth will reach 8% or 9% this year, we expect to see the lowest number in terms of GDP growth in the first quarter next year," said Frank Yao, senior portfolio manager of Greater China at the firm.

"That brings lots of implications to the equity markets and global commodity markets," Yao told reporters at the briefing.

China's GDP grew by a lower-than-expected10.3% in the second quarter this year, compared with a 11.9% increase in the first quarter. By all means, that is not bad news for the world's fastest-growing economy, because it is what Beijing wants to see. It started tightening credit earlier this year when it ordered banks not to issue more than Rmb7.5 trillion ($1.1 trillion) in new loans this year, which is 22% less than 2009. Beijing has also reined in local government borrowing through financing vehicles, approved fewer infrastructure projects and reduced capacity in energy-intensive sectors.

That said, the central government has appeared to have left the IPO market alone. The total number of new share offerings on the Shanghai and Shenzhen stock exchanges in the first half of this year is 176, compared with no listings in the same period last year. The IPO funds raised amounted to Rmb212.7 billion, according to PricewaterhouseCoopers (PwC).

Nevertheless, the benchmark Shanghai Composite Index, which tracks the bigger of China's stock exchanges, fell 26% in the first half, making it one of the worst performers in the world. The decline reflects worries that Beijing may introduce more severe measures to curb inflation as well as property and stockmarket speculation.

Yao's outlook echoes the views expressed by Ha Jiming, chief economist at China International Capital Corp (CICC). Ha said at a recent seminar in Beijing that China's growth will decline gradually throughout the rest of the year. He estimated that growth will fall to 8% or less in the fourth quarter.

Will the Chinese economy see a double-dip recession? No. "There is no need to panic because this is just a slowdown, not a meltdown, in our view," wrote Qu Hongbin, chief economist for Greater China at HSBC, in a research note.

"This is just moderation towards more sustainable growth. We believe China should achieve around 9% GDP growth in the second half of this year and 2011, relying on massive ongoing investment projects and resilient private consumption," Qu explained.

There are more than100,000 ongoing infrastructure projects that should last for another 12-18 months, which will help support China's economic output, according to HSBC. And analysts don't expect policymakers to cool the economy so much as to grind it to a halt.

As a result, observers agree that China continues to be an engine of world growth. Despite a sharp slowdown, it is still set to overtake Japan as the world's second-largest economy, just behind the US.

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