The World Bank cut its forecast for China's 2012 economic growth to 8.2 percent on Thursday and said a rebound might not begin before the third quarter of the year as slack foreign demand and a government-induced real estate slowdown restrain a recovery.
There is the potential for growth to be bumping along the bottom for longer, Ardo Hansson, the World Bank's lead economist for China, told a news conference to release the multilateral lender's quarterly update on China.
The Bank's new growth forecast for the world's second-biggest economy would mark a 13-year low, compared with an 8.4 percent, 11-year-low estimate in November 2011.
An 8.2 percent expansion would mean China's economy was growing slightly below its potential rate, Hansson said. In economic terms, it implies Beijing has space to tweak policies to boost growth without igniting inflation.
We see cyclical weakness continuing, but that the prospects for a soft landing remain high, Hansson said, adding that Beijing had considerable fiscal resources available to help bolster the economy if risks to the downside accelerate.
The Bank's economics team believes that when recovery does come, most likely by the middle of the year, but possibly not before the third quarter, its shape would be somewhere between a vigorous 'V' and a flat 'L'.
Though the report characterizes the bounce as mild, it is faster than expected in November, when 2013 growth was estimated at 8.4 percent compared with 8.6 percent in the latest report.
The World Bank forecast China's export growth at 9.7 percent this year and 11.6 percent in the next, with import growth likely at 12 percent in 2012 and 12.5 percent in 2013.
That outcome would see external demand having a negative contribution to growth for a second successive year, with trade subtracting 0.3 percent from GDP in 2012 and adding nothing at all in 2013, according to the Bank's forecasts.
REAL ESTATE RISKS
While risks to overseas demand for goods from China's vast factory sector were seen as a key external restraint on growth in the near term, the bigger problem was domestic real estate.
The report welcomed the gradual cooling of a sector that had been in the grip of a speculative frenzy before the government unveiled a slew of policies to calm it two years ago. But it cautioned that downside risks were centered on that adjustment.
Given the significance of the sector in the overall economy, continued vigilance will be required to contain negative spillover effects, the report said. A more amplified downturn could have negative economy-wide impacts.
Real estate investment made up about 13 percent of China's GDP in 2011 and directly affects about 40 different industries.
Premier Wen Jiabao has pledged to keep the curbs until home prices return to what he says is a reasonable level. Prices in major cities have fallen for five straight months, but remain elevated after rising 10-fold in the past decade.
China's average home prices will probably fall between 10 and 20 percent this year, a pace modest enough to prevent a hard landing of the economy, according to a Reuters poll in January.
Hansson said that property tightening so far had not been overdone when looking at things on a national basis, though developments in specific cities might require particular policy responses to prevent wider fallout.
This is a sector that is difficult to micro-manage and fine-tune. There's a lot of uncertainty about the timing of the effects after you pull the policy levers, he said.
Fine-tuning monetary and fiscal policy has been Beijing's mantra in fighting a downturn that has put China on its worst run of quarterly sequential slowing since the depths of the 2008/09 global financial crisis and likely in for its weakest full year of growth in a decade.
POTENTIAL FOR POLICY ACTION
Further monetary support would be appropriate if the economy slows down further. To support access to credit and facilitate refinancing, further reserve requirement and policy rate action would be called for, the report said.
The People's Bank of China has cut the proportion of deposits banks must keep as reserves by 100 basis points in two moves since late 2011 in a bid to keep credit growing in the face of a recent slowdown of foreign capital inflows, which had underpinned money supply growth for much of the last decade.
Analysts polled by Reuters last month expect a further 150 bps of cuts this year, though the consensus view is that the central bank will eschew outright cuts to policy lending rates.
The World Bank revisions to its outlook for the Chinese economy come ahead of China's official first-quarter growth report due on Friday at 0200 GMT, which is expected to show the country suffering its slowest three months of growth in three years.
Economists polled by Reuters in March forecast Q1 GDP growth at 8.3 percent versus a year earlier. The highest estimate in the range was 8.6 percent, half a percentage point lower than the highest forecast in a poll taken in January.
The slowing economy, though, has helped cap upside inflation pressures. The Bank forecasts full-year inflation of 3.2 percent in 2012 and 3.6 percent in 2013 and Hansson said consumer prices now appeared to be on a controlled path.
(Reporting by Nick Edwards; Editing by Ken Wills & Kim Coghill)