World Bank Forecasts Lowest China Growth in a Decade

The World Bank lowered its growth forecast for China to 7.7 percent on Monday, 0.5 percent below its April estimate, according to the China Daily:

The World Bank also lowered China’s growth forecast in 2013 to 8.1 percent, from 8.6 percent. The global lender expects developing economies in East Asia to grow slower.

“China is experiencing a double whammy – the growth slowdown is driven by weaker exports as well as domestic demand, in particular investment growth,” Bert Hofman, World Bank chief economist for East Asia and the Pacific, said at a briefing in Singapore.

Although there was a risk the slowdown in China could worsen and last longer than many analysts forecast, Hofman stressed that the World Bank still expects China to have a soft landing.

The forecast was based on the bank’s East Asia and Pacific Data Monitor released on Monday.

China’s Central bank has already cut interest rates twice this year and reduced banks’ required reserve ratios on three occasions in an effort to spur growth. Writing in the latest issue of the state-published China Finance magazine, People’s Bank of China head Zhou Xiaochuan said China would keep monetary policy flexible and pursue financial reforms to fight the economic slowdown. From Reuters:

“The external environment for our country’s economic growth is very grim,” Zhou said. “The impact from the international finance crisis is unabated and strengthening, and downward pressure on the domestic economy remains relatively big.”

Given trying circumstances, Zhou said the central bank would seek to make policy more effective while providing stability.

“Whilst keeping the continuity and stability in monetary policy, the bank will make policy more preemptive, targeted and effective,” he wrote.

Bloomberg reports that Chinese stocks have tumbled 34 percent from their November 2010 highs, and the Shanghai Composite Index hasn’t traded so cheap since at least 1997, as the country battles its worst economic slowdown in more than a decade:

Haitong Securities Co. strategist Chen Ruiming, who correctly predicted on Aug. 1 the index would fall below the 2,000 level, says the measure is poised to drop a further 14 percent to 1,800 this year. China’s stocks will end down for a third year, according to Bank of Communications Co.’s Hao Hong, the only forecaster among 13 strategists surveyed by Bloomberg at the start of the year to predict declines for equities in 2012. Falling interest rates and increasing copper prices — which foreshadowed the rally in 2009 — aren’t predictive this time around, said David Cui, chief China strategist at Bank of America Corp. (BAC) He sees more losses for the index after saying in Feb. 22 that it would slump to 2,100 by year-end. The measure dropped 0.6 percent to 2,074.42 at today’s close.

“These signals are only indicative of a market turnaround if and when there are signs of a genuine turnaround in economic growth and the prospect of sustained improvement in corporate earnings,” Shanghai-based Cui wrote in e-mailed comments on Sept. 25. “Right now, things appear to be still heading downhill and the market cannot figure out where the bottom is.”

For Goldman Sachs’ Jim O’Neill, however, the slump in Chinese equities presents a compelling investment opportunity:

“At this moment, the Chinese market looks the most attractive to me. You don’t want to be with consensus; it’s quite easy to be on the wrong side of things,” O’Neill, the man famous for coining the acronym BRIC, said at a press conference in Singapore on Friday.

With the benchmark Shanghai Composite [.SSEC 2111.10 36.68 (+1.77%) ] trading at historically low valuations, he argues that the market is ripe for stock picking.

As China rebalances its economy towards being more domestically-driven rather than export oriented, there are going to be a lot of new winners, O’Neill said.

“Go long anything to do with the new China, and short anything to do with the old China,” he said.