China's supply-side reform to help sustain growth: UBS

BEIJING - China's supply-side reform will unlock new sources of growth to help the economy fend off downward pressures amid a fading global economic recovery, Swiss bank UBS said.

China's economy expanded 6.7 percent year on year in the first quarter, slowing further from the previous quarter.

Despite the downward trend, the government is eying an average annual growth rate of no less than 6.5 percent during 2016 to 2020 to build a "moderately prosperous society," according to the country's 13th Five-year Plan.

"Growth is still a top priority in the five-year plan," the bank said in a research note.

Given continued economic headwinds and ambitious growth targets, China has made supply-side reform a priority to release new sources of growth and increase economic efficiency. Proposed by China's policymakers in November, the reform is considered a new economic strategy to facilitate restructuring and pep up growth.

As part of the efforts to propel the reform, the government has planned to increase spending on R&D, encourage private investment, support emerging industries and upgrade traditional engines.

Those measures should lead to enhancement of human capital, raising of total factor productivity and increased supply in non-excess capacity areas where demand exits, UBS said..

"The pace of SOE (state-owned enterprise) reform and capacity adjustment this year will likely be gradual. In the medium term, capacity adjustments may impose a modest but sustained drag on industrial growth," UBS said, adding that slow progress is being made in registration-based IPOs and fiscal reform. Public infrastructure investment will likely remain a strong economic driver.

"We expect infrastructure investment growth to stay robust about 16 percent in 2016, which should help stabilize overall fixed asset investment and GDP growth," UBS said.

High speed rail and expressways will grow rapidly from 2016 to 2020, while other areas including inter-city railways, urban transportation, underground tunnels and pipelines will also be supported.

The country will also focus more on urbanization, poverty reduction and social welfare during 2016 to 2020, all of which are positive for consumption and the service sector, UBS said.

The bank upgraded China's GDP growth forecast to 6.6 percent for 2016 and 6.3 percent for 2017 in April due to encouraging new economic indicators and better credit and fiscal policy support in Q1.