Lender says economic recovery unlikely in forthcoming quarter

Bank of China Ltd said on Thursday that it was lowering its annual GDP growth forecast for China to 7.4 percent from 7.5 percent and said more favorable fiscal policies, like support to weaker sectors and easier property purchase norms, are essential to maintain the growth momentum.

The State-owned lender said that the revision was necessary as a study undertaken by its research unit - the Institute of International Finance - showed that the economy is unlikely to show a marked recovery in the forthcoming quarter.

The institute also lowered its growth forecast for the third quarter to 7.3 percent, from the 7.6 percent projection it had made in July, citing weakening foreign and domestic demand, real estate adjustment and overcapacity.

A string of disappointing economic indicators in August had damped hopes that the growth momentum seen in June would extend into the third quarter also. Industrial output growth, in particular, fell to a six-year low of 6.9 percent in August.

"The economy has been facing rising pressures due to the downturn since the beginning of the third quarter, and is still at the bottom phase," said Li Jianjun, a senior researcher at the institute.

On the monetary policy front, the institute believes that the government may go in for a "steady", but with some "targeted easing" approach. The central bank is expected to continue lowering interest rates for some sectors, such as micro and small business and for other sectors like information consumption, healthcare and culture.

On the fiscal front, the institute believes that an optimization of the fiscal spending structure, tax cuts for small businesses and a hike in the individual income tax threshold are essential.

The property sector, which has already seen a sales downturn, is unlikely to face fresh pressure from sluggish demand as a further easing of local purchase controls is expected, it said.

"The real estate policy will return to a market-based mode with more cities expected to ease purchase restrictions. Besides, we expect more credit easing, such as lower down payment requirements and more discounts on the mortgage rate for first-home buyers. It is also possible that credit for second-time homebuyers could be loosened," Li said.

The Economist Intelligence Unit, a global think tank, said on Thursday that it was "seriously considering" lowering China's annual growth target to 7.3 percent from 7.5 percent, given the poor economic data in July and August.

The EIU had earlier hiked its China growth forecast to 7.5 percent from 7.3 percent, after the economy grew at a healthy pace of 7.5 percent in the second quarter.

Liu Qian, deputy director of China services at the EIU, said: "There was considerable debate among our analysts (in terms of annual growth) after the disappointing figures for July and August. Most of them believe that China will not be able to achieve its full year growth target of 7.5 percent without stimulus, and the chances (of stimulus) seem rather slim for now."