China's economy could grow 6.5 percent in 2017; devaluation could stabilize yuan: think tank

SHANGHAI (Reuters) - China’s economic growth could slow to 6.5 percent this year from about 6.7 percent in 2016, a government-run think tank said on Tuesday, while suggesting a one-off devaluation could help stabilize the yuan currency.

An employee works at a steel factory in Dalian, Liaoning Province, China, June 27, 2016. REUTERS/Stringer

In an article in the Shanghai Securities News, the forecasting department at State Information Center (SIC) said momentum from new technology would continue to stimulate economic growth but could not stop the broader slowing trend.

Industrial output could grow 5.9 percent this year, down from an estimated 6.1 percent in 2016, it said.

Meanwhile, authorities should increase the role of the market in formation of the yuan exchange rate CNY=CFXS, increase the currency's flexibility "and even conduct a one-off devaluation of the renminbi, and thereby maintain renminbi stability at a balanced level", it said.

The yuan fell nearly 7 percent last year - its biggest annual loss against the dollar since 1994 - under pressure from sluggish economic growth and a strong dollar.

China’s last one-off currency devaluation, a 2 percent move in August 2015, shocked global markets and was widely viewed by traders and economists as a failure.

With the yuan still weakening and capital outflows steadily eroding China’s forex reserves, pundits have discussed the possibility of a second devaluation, but there has been little indication that policymakers were considering such a move.

Capital outflows have been a growing concern for the government in the past year as it attempted to put the economy back on track and keep the currency stable without exhausting its reserves, which tumbled to $3.052 trillion in November, the lowest in almost six years.

The SIC said China “should appropriately control capital outflows... keep tight control over state-owned firms’ overseas investments in property, antiquities, sports teams” and other non-core or non-technological transactions.

China’s fundamentals including its economy, monetary policy, trade surplus and the ability to attract foreign investment all point to the fact that there is no need for the government to worry too much about the total amount of foreign exchange reserves it holds, the state-owned People’s Daily said on Tuesday.

“China has no need to ‘regard foreign exchange reserves as gold’,” the overseas edition of People’s Daily said.

China’s foreign exchange regulator said late on Saturday that from the start of the year it would step up scrutiny on individual foreign currency purchases and strengthen punishment for illegal money outflows, although the $50,000 annual individual quota will remain unchanged.

China’s economy grew 6.7 percent in the third quarter of 2016 from a year earlier and looked set to achieve the government’s full-year forecast of 6.5-7 percent, buoyed by higher government spending, a housing rally and record bank lending that have also led to an explosive increase in debt.

Many analysts believe growth is lower than official data suggests, but acknowledge that the construction boom has given activity a better-than-expected boost this year.

Reporting by John Ruwitch, Jing Wang and Winni Zhou; Editing by Kim Coghill