BEIJING (Reuters) - China's economic growth is likely to slow to 8.5 percent in 2012 from 9.3 percent this year, but the global headwinds it faces could be partly offset by supportive policy steps, the Organization for Economic Co-operation and Development (OECD) said on Monday.
In its biannual outlook, the Paris-based body said the world's second-largest economy also faces risks from a property sector downturn that could lead to a resurgence in bad bank loans.
"Real GDP is set to grow below potential in 2012. Together with a fall in import prices, this should help disinflation, permitting some reduction in policy interest rates," it said.
"By mid-2012, developments in inflation and housing prices should permit the PBOC to start lowering interest rates, boosting domestic demand and GDP in 2013," it said.
China's GDP growth slowed to 9.1 percent in the third quarter compared with a year earlier, easing from a 9.5 percent expansion in the second quarter and 9.7 percent growth in the first three months of the year.
Meanwhile, annual inflation dipped to 5.5 percent in October, pulling back further from July's three-year peak but staying above the full-year official target of 4 percent.
As growth loses steam, the central bank has started to unleash credit to cash-starved small firms in "selective easing" and has promised to fine-tune policy if needed.
Data last week which showed China's factory activity shrank the most in 32 months revived fears that it may be slipping toward a hard landing and fueled fears of a global recession, while underscoring expectations Beijing will lean more on policies to boost growth than ones to fight inflation.
Full-year annual inflation is expected to fall to 3.8 percent in 2012 from 5.6 percent this year, the OECD said.
China's annual export growth could slow to about 7 percent next year on weakening world demand, but the impact could be offset by increased fiscal spending and a cut in income taxes.
But the scope of fiscal stimulus next year would be limited by concerns over mountains of local government debt, it added.
China's imports surged 28.7 percent in October from a year earlier while exports grew at 15.9 percent, their slowest rate in months, capping the monthly trade surplus at $17 billion.
The OECD projected that China's current-account surplus relative to gross domestic prodcut would fall to 2.6 percent in 2012 and to 2.1 percent in 2013, as Beijing tries to rebalance the economy toward domestic demand and away from exports.
A property sector downturn could pose a threat to economic stability as residents hold back from home buying and developers struggle to cope with unsold property, it said.
"A prominent domestic risk overshadowing the economic outlook stems from the financial health of property development companies," the OECD said, adding that failures of large developers could put some bank loans at risk.
The government has taken a slew of measures since late 2009 to rein in the exuberant housing market, including raising mortgage rates and down payments, making it difficult for both home buyers and developers to get bank loans.
The property sector contributes around 10 percent of the country's GDP growth and affects a chain of industries, including steel, cement and other commodities.
With domestic demand and foreign trade picking up in 2013, China's economic growth is likely to rebound to 9.5 percent, the OECD predicted.
In the report, the OECD also called for the Chinese government to forge ahead with long-term structural reforms to help sustain growth and embrace market-driven interest rates that could make monetary policy more effective.
** For more news on the OECD report, see
Reporting by Kevin Yao; Editing by Ken Wills & Kim Coghill