BEIJING (Dow Jones)--The Asian Development Bank said Tuesday it cut its forecast for China's economic growth this year to 7%, because the impact of the global financial crisis on the country has been much worse than previously thought.
The Manila-based development bank had forecast the world's third-largest economy would grow 8.2% in 2009 in its semiannual Asia Economic Monitor report that it issued in December.
However, Beijing's expansionary fiscal and monetary policies to support faltering growth should allow China's economic growth to recover to 8% in 2010, the bank said in its Asian Development Outlook 2009.
The bank expects growth in China's gross domestic product to ease to about 6% in the first quarter this year from a year earlier, compared with growth of 6.8% growth in the fourth quarter.
It said China's GDP growth may rise to about 8% in the second half of 2009.
China's government must now hasten reforms to restructure its economy by reducing emphasis on investment- and export-led growth and boosting private consumption as a strong source of growth, the bank said.
"China will emerge from the crisis in better shape than it was before if it can rise to the challenge of rebalancing its economy," said Jong-Wha Lee, ADB's Acting Chief Economist. "The country is on a sound financial footing and has the necessary tools at its disposal to achieve this goal," Lee said.
The bank now projects China's consumer price index, the country's key inflation gauge, to rise 0.8% this year, compared with its previous forecast for a 5.5% increase that it gave in an update on its 2008 outlook that it issued in September. It said it expects China's CPI will rise 1.0% in 2010. The CPI will likely continue to fall in March after February's 1.6% decline from a year earlier, which was the first year-on-year decline in China's CPI in more than six years, Jian Zhuang, a senior economist from the ADB's resident mission in China, said Tuesday on the sidelines of a news conference.
The bank said it expects China's exports to drop about 4% in 2009 on a dismal external outlook, before rebounding to 8% growth in 2010.
Yolanda Fernandez Lommen, macroeconomics and economic policy chief at ADB's resident mission, said she doesn't expect any major change in China's foreign-exchange policy to help the country's exporters.
"Yuan depreciation won't help China's exports," Fernandez Lommen said. China's exports declines are due to weaker global demand, she added.
Meanwhile, lower global oil prices and softer domestic demand for raw materials will reduce imports this year by about 7%, it said. It forecast imports to rise 10% next year.
The country's trade surplus is likely to continue to rise, the bank said, without giving any forecasts.
It forecast China's current account surplus to drop slightly from more than 10% of GDP in the past two years to 8.4% in 2009 and 7.8% in 2010. Capital inflows to China are likely to remain suppressed by the global financial crisis, the bank said.
Foreign-exchange reserves will likely rise to $2.2 trillion in 2009 and to $2.5 trillion in 2010, the bank said. The latest official figures show that China's foreign reserves totaled $1.95 trillion at the end of last year.
The bank said private investment, a key driver of growth for China in recent years, is likely to slow and the property market, which had its first decline in three years in 2008, will remain soft.
In contrast, private consumption growth is likely to remain buoyant at around 8-9% this year, it said.
"The low level of inflation will benefit consumption, so will the subsidy for people in rural areas to buy household appliances and some of the stimulus package measures," said Lee.
The report warned that increasing levels of unemployment, largely as a result of the downturn in the manufacturing sector, is China's most pressing issue.
It said investment projects in the country's stimulus package will generate jobs, but not enough to absorb the growing labor surplus.
The bank stressed that it will be important for the government to strengthen social protection programs, particularly for migrant workers who lose their jobs and return to the countryside, where there is little work.
The bank also suggested that China should accelerate the reform of the pricing of natural gas, water, and electricity as global energy prices fall.
The ADB's Zhuang said Beijing is likely to continue to allow local governments to issue bonds next year after it approved CNY200 billion worth of municipal bond issues this year, as the bonds will help fund the country's CNY4 trillion stimulus package.
But he said the government is unlikely to allow municipal bond issues after next year.
China is also encouraging banks to lend to certain sectors of the economy to help reverse the downturn. But Fernandez Lommen said that while the non-performing loan ratio of the country's commercial banks is likely to increase in 2009 from 2.5% in 2008, it will "maintain manageable levels."
