UBS cut its 2011 and 2012 growth forecasts for China on Thursday to reflect weaker growth prospects in developed economies, saying the central bank may relax policy if the world's second-largest economy falters.
UBS now expects 2011 gross domestic product growth of 9 percent, down from its earlier projection of 9.3 percent. For 2012, it sees GDP growth of 8.3 percent, down from its previous forecast of 9 percent, it said in a report.
This downward revision reflects much weaker growth prospects in developed economies, Tao Wang, the bank's China economist, said in the report.
A significant drop in export growth, which could start in the fourth-quarter of 2011, is also expected to affect manufacturing investment and consumption, Wang said.
UBS has lowered its forecast for China's export growth in 2011 to 15.1 percent from 18 percent and slashed its prediction on 2012 export growth to 5.5 percent from 12 percent.
Net exports could subtract about one percentage point from China's GDP growth in 2012, it added.
The People's Bank of China is likely to keep interest rates on hold for now, and could opt to ease policy if exports, investment, and industrial production slow sharply, UBS said.
If real economic activity such as exports, production, and investment has faltered by then, we think the government could start to ease policy as early as end 2011, Wang said.
The central bank has refrained from raising banks' reserve requirement ratio since June, after increasing it every month in the first half of 2011. It last raised interest rates on July 6, the fifth increase since October.
UBS has also cut its inflation outlook for China to 5.2 percent from 5.3 percent in 2011 and to 3.5 percent from 4 percent in 2012.