(REUTERS) - China's annual growth target for 2012 looks increasingly in jeopardy as demand at home falters and Europe's debt crisis worsens, complicating matters for Beijing as the country heads into a once-in-a-decade leadership transition.
The slowdown in the world's second-largest economy could be more entrenched than expected as Beijing's property tightening measures dilute the impact of any fresh policy stimulus, diminishing China's ability to offset faltering demand in Europe and the United States.
I cannot see a bottom in economic growth. The general slowdown trend may not change anytime soon, Shi Xiaomin, vice president of the China Society of Economic Reform, a government think-tank in Beijing, told Reuters.
HSBC's flash PMI showed China's factory sector shrank for an eighth straight month in June as export order sentiment hit its weakest level since early 2009, indicating the economic trough may extend well into the third quarter.
The economy is definitely on a downward slope, said Gao Shanwen, chief economist at China Essence Securities in Beijing.
Gao expects annual GDP growth to hover between 7-7.5 percent in the second- and third-quarter, before a modest recovery towards the year-end as policy stimulus gains traction.
Premier Wen Jiabao in March cut the 2012 growth target to 7.5 percent, which if realized would be the lowest since 1990.
While that target was seen as typically conservative for Chinese leaders, global conditions have deteriorated sharply since then, with much of Europe now facing a prolonged recession and the U.S. economy appearing to be losing steam.
Analysts forecast in a Reuters poll in May that China would deliver second-quarter economic growth of 7.9 percent from a year earlier, with full-year growth of 8.2 percent, which would be the lowest since 1999.
But weaker domestic and overseas data since then has prompted some to cut forecasts and many analysts now believe second-quarter growth could be just over 7 percent. In early June, the central bank surprised markets by cutting interest rates for the first time since 2008 to combat faltering growth.
Continued weak performance into the second half could increase the risk of missing Beijing's 2012 target, although most analysts still see that as the worst-case scenario.
I think they are likely to achieve it, but obviously there could be a risk, said Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong.
The bottom-line is that they still want to stabilize growth because this is the year of leadership transition, said Huang, who still expects the economy to grow 8.1 percent in 2012.
But Shi maintained his bearish outlook that 2012 growth could slow to around 7 percent from last year's 9.2 percent.
IS POLICY EASING WORKING?
There is no authoritative definition of a hard landing in China, but analysts expect job losses to rise if GDP growth dips below 7 percent.
The last time Beijing's annual target was under threat was in 2009, when growth tumbled to just 6.6 percent in the first quarter, before Beijing's massive 4 trillion yuan ($629 billion) stimulus powered full-year expansion back to 9.2 percent.
Unlike in 2008/09, the job market has remained relatively tight so far this year, partly reflecting the country's demographic shifts, but evidence abounds that smaller and mid-sized private firms are increasingly struggling with slackening orders, rapid wage increases and higher raw material costs.
Sportswear brand Li Ning Co (2331.HK: Quote, Profile, Research, Stock Buzz) recently became the latest Chinese firm to issue a profit warning, saying earnings could drop sharply this year due to weaker sales, further dampening confidence in the power of the once-vaunted Chinese consumer to offset any external weakness.
Many local governments, bearing the brunt of economic slowdown, have been lobbying for Beijing to relax property controls and credit curbs to local projects, according government economists familiar with the policy-making process.
Local governments have seen revenues from property-related land sales tumbling, as they struggle to repay 10.7 trillion yuan ($1.68 trillion) in debt.
But Beijing has made clear that it will not repeat another massive fiscal stimulus similar to the one in 2008, which bolstered growth but left an unwelcome legacy of strong inflationary pressures and a potential property bubble.
Policymakers have so far offered a few modest and more targeted programs, such as extending a cash for clunkers program to boost car sales and offering incentives for consumers to buy more energy-efficient appliances.
However, analysts say the central bank may have to ease policy further by cutting banks' reserve requirement ratios (RRR) or interest rates again to help stabilize growth.
Probably the second quarter will be the low in terms of the growth rate and growth will pick up in the third quarter. If they (policymakers) don't see it, they will ease more, said Tim Condon, head of Asia research at ING in Singapore.
Condon expects two more interest rate cuts and two cuts in the RRR, both in the third quarter. Gao at China Essence has penciled in one more rate cut and 2-3 RRR cuts by the year-end.
Still, some economists are skeptical about the effectiveness of policy easing, noting Chinese manufacturers are already facing overcapacity and are less likely to take out fresh loans.
While May bank lending was stronger than expected, many of the new loans were believed to be linked to Beijing's move to fast-track infrastructure investment as opposed to a rebound in broader economic activity.
The government has been gradually relaxing monetary conditions, but credit has not shown a significant increase because demand for long-term loans is shrinking, said Wang Jian, a researcher with the National Development and Reform Commission, the country's top planning agency.
The trend of economic slowdown may not change before the end of 2013, Wang wrote in an article published in the official China Securities Journal last week.
The biggest drag on domestic demand stems from a slowdown in the property sector, which was worth about 13 percent of China's GDP in 2011 and directly affects more than 40 industries.
It's hard to do. Because the best way to boost domestic demand is property, it's the easiest way, said Condon. In some sense, they tied their hands behind their backs a bit.
Beijing appears to be sticking to two-year-long campaign to curb property speculation, though home prices may be nearing their bottom as the government eases monetary policy and local governments look for ways around the property restrictions.
At the central government level, they still want to keep some pressure, at least until the political transition, said Wei Yao, China economist at Societe Generale in Hong Kong.
President Hu Jintao and Premier Wen are due to make way later this year for a new generation of leaders.
That's why we are not very positive about the second half. The property sector is still a big drag (on the economy).
Property investment is slowing sharply this year as banks keep their purse strings tight for developers, who are struggling with mounting inventories due to fast development in the past.
Peng Wensheng, chief economist at CICC, believes annual growth in China's real estate investment could more than halve to 13 percent in 2012 from 27.9 percent last year, dragging the overall investment growth down to 18 percent from 23.8 percent.
Ironically, a sudden move by Beijing to roll back property curbs could be a sign that the economy is in much deeper trouble, some economists say.
Premier Wen, who has vowed to bring home prices down to a reasonable level, may pass on the sensitive issue to his successor Li Keqiang, who will take office early 2013.
It's a hot potato. We still need to watch how the new government might do, said He Yifeng, an economist at Hongyuan Securities in Beijing. ($1=6.3642 yuan)