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Economy

Economists fret as China ponders growth versus stability

Central bank wrestles with conflicting priorities amid an economic slowdown

China's economic policymakers face a tough balancing act.

HONG KONG Economists see the tighter monetary policy put in place by China's central bank as a downside risk. They worry that efforts to curb capital outflows and a real estate bubble will weigh on the economy.

Tighter monetary policy has risen to second place on the list of economists' top concerns about China in a new Nikkei/Nikkei Quick News survey. As in the previous quarterly poll, respondents expressed the greatest concern over a downturn in real estate. Asked to rate how bubbly the market is on a scale of 1 to 10, economists pegged it at 7 on average, unchanged from the previous survey.

SINKING FEELING The People's Bank of China has guided short-term interest rates slightly higher recently. Many respondents expect the central bank to nudge rates upward over the next year through such channels as open-market operations, rather than by changing the policy rate or the reserve requirement ratio.

"The [PBOC's] monetary policy stance has officially shifted from easy to neutral, and the authorities are sounding determined to contain asset bubbles and financial leverage," said Yao Wei, China economist at Societe Generale Corporate & Investment Banking.

"The policy framework in China has a major impact on the overall economy, equity, and property and commodity markets," said Sean Taylor, chief Asia-Pacific investment officer at Deutsche Asset Management.

The yuan is expected to continue softening against the dollar. Sustained downward pressure on the yuan, on expectations that the U.S. will raise interest rates further, is expected to outweigh the impact of measures to check capital flight. On average, respondents see the yuan weakening 2.5% to around 7.12 by year-end.

"We also expect Beijing to have become more sensitive [to the need] to keep yuan depreciation limited in order to lower the risk from U.S. protectionism," said Arjen van Dijkhuizen, senior economist at ABN Amro Bank.

Shen Jianguang, chief China economist at Mizuho Securities Asia, said, "We expect steady economic growth in the first half of 2017, both directly via infrastructure and indirectly through positive spillovers to related manufacturing industries, supported by government stimulus." Forecasts for inflation-adjusted gross domestic product growth in the January-March quarter averaged 6.7%, slightly slower than the previous quarter's 6.8%. Official data is due out April 17.

Policymakers are expected to focus on stability ahead of a leadership reshuffle at the Communist Party Congress this fall. "The Chinese government still has ample policy room to support its economy," said Ricky Choi, senior economist at the economic research division of Bank of China (Hong Kong).

Nikkei staff writer Zheng Zhi in Hong Kong contributed to this report.

Economists responding to this survey, in alphabetical order by company:

Arjen van Dijkhuizen, ABN AMRO Bank; Aidan Yao, AXA Investment Managers Asia; Ricky Choi, Bank of China; Richard Jerram, Bank of Singapore;  Fan Xiaochen, Bank of Tokyo-Mitsubishi UFJ; Xia Le, BBVA Research; Peter So, CCB International Securities; Xie Yaxuan, China Merchants Securities; Liu Li-gang, Citigroup Global Markets Asia; Kevin Lai, Daiwa Capital Markets; Chris Leung, DBS Bank; Sean Taylor, Deutsche Asset Management; MK Tang, Goldman Sachs; Thomas SHIK, Hang Seng Bank; Qu Hongbin, HSBC; Susan Joho, Julius Baer; Zhu Haibin, J.P. Morgan; Ken Chen, KGI Asia; Larry Hu, Macquarie; Shen Jianguang, Mizuho Securities Asia; Robin Xing, Morgan Stanley; Yang Zhao, Nomura; Yao Wei, Societe Generale; Ding Shuang, Standard Chartered Bank; Kenny Wen, Sun Hung Kai Financial; Wang Tao, UBS.

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