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Economy

Nomura sees China's growth slowing into 2016

HONG KONG - Nomura slashed forecasts for China's growth on Tuesday, citing the faster-than-expected pace of economic rebalancing as a major concern.

     The Japanese investment bank trimmed its forecast for China's economic growth in 2015 to 6.8%, down slightly from its earlier forecast of 6.9%. But for 2016, Nomura cut its forecast for China's gross domestic product more dramatically to 5.8% from an earlier level of 6.7%.

     The pessimistic view from Nomura follows those of the Asian Development Bank and World Bank. Both institutions had lowered their forecasts for China's 2016 economic growth to 6.7%.

     "The official data send a clear message that Chinese economic growth is not that good," said Yang Zhao, China chief economist at Nomura, adding that Beijing is likely to trim this year's official growth forecast to 6.5%, from 7%. "There is still a chance that the government will miss that target due to strong headwinds in China."

     One main drag, according to Nomura, is a cooling Chinese property market that has translated into slower growth in related sectors including manufacturing and construction.

     Growth in China's property investments in the first nine months in 2015 slowed to 3.5%, from 20% in 2013. Zhao further expects investments to "drop to negative territory" in 2016 - the first time since 1997, due to an oversupply of housing in lower-tier cities.

     The volatile equities market is unlikely to provide any stimulus for future GDP growth either. Nomura estimated the massive equity rally in July contributed an oversized 1.4 percentage points to China's reported growth of 7% in the first half of 2015, 0.7 percentage points higher than usual.

     "This is mainly due to an equity bubble in the first half this year. If we remove (this factor), the true growth in the real economy would only be around 6.2% to 6.3%," Zhao said.

     Nomura expects moderate fiscal stimulus from Beijing in the form of infrastructure spending that would narrow the fiscal deficit to 3% of GDP.

     The People's Bank of China will continue monetary easing, Nomura said, by cutting the bank reserve requirement ratio by 50 basis points on four occasions in 2016 to curb capital outflow driven by a weakened yuan.

     With growth slowing down, credit defaults will become an issue. Nomura expects to see banks reporting rising non-performing loans. Since April, two Shenzhen-listed companies and a state-owned enterprise Tianwei have defaulted on their debt although negotiations over bailouts are still underway.

     Asked if China would face a debt crunch, Zhao said it was unlikely, adding that the Chinese government would be "vigilant" to step up to "rescue any systemically important corporate ... should they be in serious trouble."

     Other analysts share the observation that China's rebalancing from export -- and investment-led to consumption-driven growth -- will weigh on its growth, at least for a time.

     "If borne out, this would follow closely the precedent set by the Japanese and South Korean economies when they underwent similar transitions, in 1973 and 1997 respectively," Maya Bhandari, director of multi asset allocation at Columbia Threadneedle Investments, said in a commentary.

     Statistics show that the Chinese economy has slowed to 7% from a double-digit growth -- a trend that matched the experiences of Japan and South Korea for whom growth in the decade post-rebalancing was only half the average of the preceding 10 years.

     So if Chinese slowdown is inevitable, how bad could it get? Bhandari said: "To see an outright contraction in Chinese GDP, the government would need to step aside completely. That seems unlikely, in our opinion."

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