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China Slowdown May Unbalance Economy, State Researcher Says

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China’s Cooling Economy Faces Instability, State Researcher Says
Pedestrians walk past a construction site in Shanghai. China this month eliminated the lower limit on lending rates offered by the nation’s financial institutions as economic growth slows and authorities expand the role of markets. Photographer: Tomohiro Ohsumi/Bloomberg

July 24 (Bloomberg) -- China’s economy may be facing a period of instability and imbalance as it transitions from high-speed growth, a state researcher said.

“Growth inertia should not be underestimated, as new growth engines and patterns have not been formed,” researcher Yu Bin said in a report by China’s Development Research Center released yesterday in London. “Market expectations are unstable, downward pressure has increased, and existing and new structural mismatches exist. The economy has become unstable and uncertain like never before.”

China’s growth slowed for a second straight quarter to 7.5 percent in the April-June period, increasing the risk that Premier Li Keqiang will miss a full-year target for the same pace. Reports in Chinese media indicating that Li will act to support expansion if needed helped send the Shanghai Composite Index up 2 percent yesterday.

The DRC is an agency advising China’s cabinet, and Yu said that if China can maintain “an appropriate macroeconomic environment,” start suitable reforms and control risks, “the growth rate for 2013 can approach 7.5 percent.”

In a question-and-answer session after presenting the report, Yu said via a translator that while the global economy may strengthen in the second half of the year, “that doesn’t mean an improvement in Chinese exports.”

He also said that “downward pressure” in the economy had been larger than expected.

“If in the second half of the year, if the slide even goes down further, then there will be more policy measures,” Yu was translated as saying. “For example we can extend our deficit, we can issue more medium- to long-term debt so then we can start some big infrastructure projects.”

‘Bottom Line’

Expansion below 7 percent won’t be tolerated because China needs to achieve a moderately prosperous society by 2020, according to a commentary published July 21 by the official Xinhua News Agency. Li said at a recent meeting with economists that 7 percent is the “bottom line” and the nation can’t allow growth of less than that, Beijing News reported yesterday.

China’s manufacturing weakened in July, according to a preliminary survey today that casts further doubt on the government’s ability to meet its growth target. The reading of 47.7, if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction.

China this month eliminated the lower limit on lending rates offered by the nation’s financial institutions as economic growth slows and authorities expand the role of markets. The central bank acknowledged that it was a limited step and said that freeing up deposit rates would be more important.

Exports unexpectedly fell 3.1 percent in June from a year earlier, the most since the global financial crisis. Industrial production rose a less-than-forecast 8.9 percent and factory-gate prices declined for a 16th month.

Gross domestic product rose 7.5 percent in April to June from a year earlier, down from 7.7 percent in the first quarter. That extended the longest streak of sub-8 percent expansion in at least two decades.

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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