CASS predicts Q1 GDP of 6.85%

A government-backed think tank is predicting first quarter gross domestic product growth to fall to 6.85 percent, as a vice-finance minister said this year could be the "most challenging" economic environment since the global financial crisis in 2008.

A report by the National Academy of Economic Strategy, under the Chinese Academy of Social Sciences, said GDP growth will slip from the fourth quarter's 7.3 percent and the key inflation gauge, the consumer price index, will rise 1.2 percent year-on-year in the first quarter.

If its prediction proves right, it would be the second-worst quarterly performance since the first quarter of 2009, when growth plunged to 6.1 percent in the aftermath of the global financial crisis.

Using a set of monthly data released by the National Bureau of Statistics, Bloomberg has calculated that monthly GDP growth in January slowed to 6.85 percent and 6.28 percent in February.

Wang Hongju, a CASS researcher, said, however, that China has "ample ammunition" to deal with downward economic pressure in the second quarter, including reserve requirement ratio cuts, loan-deposit ratio adjustments and infrastructure spending.

The new CASS figures came as vice-minister of finance Zhu Guangyao said over the weekend that he considered the current international economic environment as the most challenging since the global financial crisis.

He told the China Development Forum that under current conditions the country should adopt a "proactive fiscal policy" while maintaining a prudent monetary policy that is "neither too loose nor too tight".

The government has expressed its willingness to allow its biggest ever budget deficit in 2015 since 2008 to support spending. The Ministry of Finance has also announced that local governments will be able to swap 1 trillion yuan ($161.2 billion) of maturing, high-interest local debt for new official municipal or provincial bonds, to help ease their repayment burden.

Zhu said the swap arrangements would allow China to rein in possible risks from short-term local government bonds.

But the authorities, he emphasized, must prevent the problem of "moral hazard", without elaborating further, referring to an economic situation in which one party takes more risk because someone else is likely to bear the burden of that risk.

The ministry's priorities this year, he said, include structural tax cuts, especially unnecessary fees imposed on micro and small firms, and spending previously idle government funds.

He also said the government should reflect the massive stimulus policies adopted a few years ago. These policies are believed to be causes of the current economic woes.

Cai Hongbin, dean of Guanghua School of Management at Peking University, said despite ongoing challenges, the government - compared with some Western counterparts - has a "much more powerful" toolbox at its disposal to stabilize the economy.

However, he warned that China also has weaknesses in its "market mechanisms" too, for example an inflexible labor market and an inefficient financial market. "That's what the government has to fix, and the willingness to fix these shortfalls will determine business confidence and whether the investment environment recovers," he said.