China's slowdown likely to linger, says researcher

The mainland's economic slowdown may last longer than during the global financial crisis because of worsening external demand and limited lending to smaller companies, a state researcher said.

Growth may slow for a ninth consecutive period to below 7 per cent in the first quarter, said Yuan Gangming, an economist with the Chinese Academy of Social Sciences.

Yuan, who formerly headed CASS's Office of Macroeconomic Research in the Institute of Economics, forecast 7.4 per cent expansion in the third quarter and 7.2 per cent in the fourth.

The slowdown may pressure the next leaders to step up stimulus efforts. A report on Thursday showed China's manufacturing may contract for an 11th month, and Yuan said the central bank had been too focused on inflation at the expense of growth.

"The slowdown will definitely extend into the first quarter of next year," said Yuan, who advises the government without being directly involved in policy making. "That will provide a good starting point for the new generation of leadership to make a turnaround, because things can't get worse."

However, in a survey, economists see growth rebounding in the next quarter. The median estimates for expansion were 7.4 per cent for the third quarter, 7.7 per cent in the fourth quarter and 7.9 per cent in the first period of 2013.

The People's Bank of China has held off from easing after cutting interest rates in June and July and lowering lenders' reserve requirement ratio three times from November to May.

The Communist Party has yet to announce a date for the congress that will start the process of the leadership handover. Lu Ting, chief Greater China economist at Bank of America Corp, said the nation had "policy paralysis" as a result of the pending transition.

Yuan, who also teaches at Tsinghua University in Beijing, said unsustainable local-government spending plans would also contribute to the slowdown.

"China's medium and small-sized businesses are finding it increasingly hard to borrow money from banks - the most fundamental part of the economy is suffering," he said.

The nation's target for 14 per cent growth in the M2 money supply this year was helpful to keep inflation in check yet too low to accommodate accelerated growth.

The US Federal Reserve's decision last week to start a third round of asset purchases "may not necessarily lead to big capital inflows into China", Yuan said. "If the markets in the United States are performing better than China's, why should investors bother to come to China?"

Banks and brokerages cutting their gross domestic product forecasts this month included UBS, Morgan Stanley and Barclays.

Premier Wen Jiabao, who pledged last week to employ monetary and fiscal policies to spur growth, has accelerated infrastructure approvals while refraining from introducing a stimulus package on the scale of the one during the financial crisis.