The Asian Development Bank (ADB) has trimmed its forecast for the mainland's and the region's economic growth for this year and next year as weak European and North America demand is expected to drag down growth even as governments are likely to step up spending and ease credit supply.
Given the Western markets are expected to stay lacklustre in the medium term, the Manila-based multilateral policy bank said Asian nations other than Japan must speed up reforms and diversify sources of growth to dilute their reliance on the West, where purchasing power has been sapped by unsustainably high debt.
In a report on the region's economic outlook released yesterday, the ADB projected the mainland's gross domestic product to grow 7.7 per cent this year, lower than the 8.5 per cent it projected in April.
It also slashed its forecast for next year's growth to 8.1 per cent from 8.7 per cent.
For Asia excluding Japan as a region, growth is predicted to be 6.1 per cent this year, down from 6.6 per cent estimated in July and 6.9 per cent projected in April.
ADB chief economist Changyong Rhee said the mainland has policy room to prevent an economic crash but he urged faster reform.
"The [mainland] government has the means to cushion the economy from global turmoil," he said. "Its strong fiscal position, receding inflation and expansionary policy measures should ensure a soft economic landing, but it needs to expedite its effort to diversify the source of growth and strengthen structural reforms for inclusive growth."
Part of the structural adjustment needed is faster growth of the service sector, which accounts for almost half of developing Asia's economic output, and contributed more than 40 per cent of the mainland's growth between 2000 and 2010, according to the ADB. The ADB projects mainland consumer price inflation to ease from 5.4 per cent last year to 3.2 per cent this year and 3.5 per cent next year.
The ADB's economic growth downgrade for the mainland follows cuts by investment banks such as Credit Suisse and credit rating agency Fitch.
Credit Suisse last week cut its forecast by 0.2 percentage point to 7.5 per cent while Fitch reduced its projection by 0.2 percentage point to 7.8 per cent.
Analysts Shen Jianguang and Michael Luk, of Japanese bank Mizuho, said in a research report yesterday that they expected mainland economic growth in this year's third quarter - due on October 18 - to fall to 7.4 per cent from 7.6 per cent in the second quarter. They said that was due to an absence of effective policy support.
"Although a total of around 20 trillion yuan in stimulus has been announced by local governments recently, these projects are difficult to finance amid the central government's delay in further monetary easing, cautious bank lending, weakening fiscal revenues, and curbs on the property market," they said.
They expect Beijing to cut the ratio of reserves banks are required to keep instead of lending out in the coming days and weeks to boost credit availability.
Beijing has cut interest rates once in June and once in July this year.
It has also lowered bank reserve requirements three times between November and May.