BEIJING: Huge industrial overcapacity will drag on China’s growth this year, the Asian Development Bank (ADB) said Wednesday as it cut its forecast for the world’s second-largest economy.
In 2016 China’s GDP growth is expected to slow to 6.5 percent, the ADB said in its Asian Development Outlook, lower than its previous forecast of 6.7 percent in December and down from the 6.9 percent expansion posted last year.
The document comes at a time of global uncertainty about Beijing’s ability to make much-needed cuts to its steel, coal, and cement sectors and manage a tough economic transition to a more consumer-led model.
“Weak external demand and excess capacity in some sectors, on top of a shrinking labour force and rising wages, continue to induce a gradual decline in the PRC’s growth rate,” ADB chief economist Shang-Jin Wei said.
A “sharp slowdown” in real-estate investment will be a “drag” on the economy, the bank added, although it would be partly offset by consumption and green investment.
The ADB’s forecast matches the low end of Beijing’s 6.5-7 percent target for the year.
The bank’s China economics head Jurgen Conrad told reporters in Beijing that the government “urgently needed” to accelerate cuts to excess capacity in real-estate and manufacturing, while high corporate debt was another challenge.
“Supply-side reform is what China needs and what Asia needs,” he said, adding that Beijing would not use “shock therapy” to carry out reforms.
Heavy industries, many of them state-owned, have provided mass employment for tens of millions of people in China, but are increasingly inefficient, loss-making and debt-ridden.
“What China is now attempting to do, in terms of the transformation of the economy, is absolutely unprecedented in human history,” China country director Hamid Sharif said in Beijing.
“We know from the experience of other countries that reform is very much an art, and not a science.
“In every country, decisions have to be made taking into account what is possible, and what is achievable, rather than what some theoretical economist may sit in a room and decide ought to be done.”
Shutting down inefficient companies could cause further problems, leading to job losses of 3.6 million and drying up tax revenues for local governments, the bank noted, suggesting a “gradual approach” to avoid the social unrest that Beijing abhors.