China economic slowdown seen deepening as Beijing pushes reform

BEIJING, July 15 Sun Jul 14, 2013 5:00pm EDT

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BEIJING, July 15 (Reuters) - China's GDP growth is expected to have slowed down in the second quarter as weak overseas demand weighs on output and investment, providing a test for Beijing's resolve to revamp the world's second-biggest economy in the face of deteriorating data.

Second-quarter GDP figures are due to be published on Monday along with other indicators, including industrial output and retail sales for June.

A Reuters poll of forecasts by economists projected China's economy grew 7.5 percent in the April-June quarter from a year earlier, slowing from 7.7 percent in January-March.

However, trade figures last week showing an unexpected fall in exports for the first time in 17 months raised market concerns GDP could be weaker than expected.

New Premier Li Keqiang has been prominent in pushing for economic reform over fast-line growth, suggesting the government is in no rush to offer fresh stimulus to revive an economy in a protracted slowdown. Before Monday's figures, growth had already slowed in eight of the last nine quarters.

"I'm sticking to our forecast of 7.5 percent Q2 growth, but there is rising downside risk," said Zhiwei Zhang, chief China economist with Nomura in Hong Kong.

The government's official growth target for 2013 is 7.5 percent, impressive by world standards but it would be the slowest pace in 23 years for China.

Analysts have cut their forecasts for 2013 full-year growth in recent weeks following a run of weak data and government comments on slowing growth. But they mostly remain between 7 and 7.5 percent.

Last week, customs data showed China's exports fell 3.1 percent in June against forecasts for a rise of 4 percent, while imports dipped 0.7 percent versus an expected 8.0 percent rise. The customs administration added that the outlook for July to September was "grim."

Other figures had shown factory-gate deflation persisted for a 16th straight month, backing the view that the economy, plagued by industrial overcapacity, is losing momentum.

Annual consumer inflation accelerated more than expected in June, but remained subdued at 2.7 percent, below Beijing's annual target of 3.5 percent.

The main worry for China's leaders is if the economic slowdown leads to high unemployment that could spark social unrest. So far government officials say employment is stable.

So for now economists do not see any major stimulus or policy shift and instead expect the government to tough out the slowdown as they pursue a longer-term vision of reforming the economy towards consumer-led, rather than export- and investment-led growth.

Beijing is still cleaning up trillions of dollars in local government debt left over from its last spending spree during the 2008/2009 global financial crisis, while trying to rein in off-balance-sheet loans.

"The focus is still on reforms. The chances of a cut in interest rates or banks' reserve ratio look slim," said Xu Hongcai, senior economist at the China Centre for International Economic Exchanges (CCIEE), a think-tank in Beijing.

"Previously, when the economy was not good, local officials held out their hands for money from the central government. But now they have to embrace reforms as no money will be given."

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