China's role as a global economic powerhouse has come under pressure recently, with the IMF one of the latest financial institutions to offer a more bearish view of the nation's growth outlook.

The Washington-based fund trimmed its global growth forecast for 2013 from 3.3 percent to 3.1 percent on Wednesday, citing a weaker outlook for China's economy.

China's growth rate for this year is expected to be 7.8 percent, down from the previous forecast of 8.1 percent, according to the IMF's latest World Economic Outlook.

The Fund's projection came on the heels of Citigroup Inc cutting its China growth forecast.

On Monday, the US banking giant lowered its China GDP growth projection for 2013 from 7.6 percent to 7.4 percent, and from 7.3 percent to 7.1 percent for 2014. It said in a statement that the downward revision was because of concerns about "policy missteps."

"The recent episode in the interbank market highlights the lack of communication with the market and possibly [a lack of] coordination between government agencies," said the statement.

Citigroup's revision of its forecasts is likely to further dampen investor sentiment, but the liquidity crunch in the country's money market last month appears to be easing, with interbank rates falling back to normal levels.

However, debate is continuing over whether the People's Bank of China (PBC), the country's central bank, has gone too far in its sudden policy reversal, with its refusal to inject liquidity into the market despite the crunch.

There is a consensus among economists that a further cooling of China's economy is inevitable amid the nation's process of economic restructuring.

But it remains to be seen how tolerant policymakers will be of a slowing economy if it risks falling below the official growth target announced earlier this year.

In the government work report delivered by former premier Wen Jiabao at the annual legislative session in March, China's 2013 GDP growth target was set at 7.5 percent, the second consecutive year for the country to target growth below 8 percent.

China's GDP grew by 7.8 percent year-on-year in 2012, according to data from the National Bureau of Statistics (NBS).

Citigroup is not the only financial institution that has cut its forecast for China's 2013 growth below 7.5 percent. Other financial institutions, including Goldman Sachs, Barclays Capital and China International Capital Corporation (CICC), have also recently lowered their forecasts below the official target.

Muted growth to continue

Prior to the announcement of second-quarter GDP growth by the NBS next week, a raft of economic indicators that have already been released for June point to a weak recovery in the economy.

The purchasing managers index (PMI), the earliest monthly data measuring economic activity for June, came in weaker than expected. The official PMI fell to a four-month low of 50.1 in June, according to the NBS, while HSBC's PMI reading fell to 48.2 for June, the lowest level since October 2012.

In a note sent to the Global Times on July 4, Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong, said the June PMI readings after lackluster growth seen in industrial output, fixed-assets investment and exports in May reinforced views about the fragile growth momentum in the Chinese economy.

After the announcement Tuesday of the consumer price index (CPI) and producer price index (PPI), market watchers said that a tightened policy stance is likely to remain.

On a year-on-year basis, the CPI saw a slight rebound in June and the PPI fell by a smaller amount.

However, it showed "the same picture of low inflationary pressure, as in previous months," Yao Wei, China economist with Societe Generale SA in Hong Kong, said in a research note sent to the Global Times on Tuesday.

"We expect headline inflation rates to remain muted in the coming months," which will not pose an obstacle to policy easing, said Yao, but the Chinese government "is unlikely to resort to any quick fix, something that it has been resisting since last year. The trend of soft growth and muted inflation may well last in the near term."

Steady reform

Instead of forecasting a hard landing or a financial meltdown amid the current lackluster growth momentum, many economists have expressed their hope of welcoming a healthier, more sustainable economy.

In the first five months of the year, the country's credit expansion has failed to translate into faster growth momentum, Peng Wen­sheng, chief economist at CICC, told reporters in Beijing on Monday, indicating the importance of the government's structural reforms.

China's broad M2 money supply jumped 15.8 percent by the end of May compared to a year earlier, according to the central bank, above the target of 13 percent for this year.

The continuing stubborn rise in property prices and the activities of local government financing vehicles have mopped up too much of the liquidity, Peng said, while cash flows to support development of the real economy have withered amid the economic slowdown.

Reform is the only solution, he said, adding that the new government is unlikely to cave in under pressure from slowing growth.

"Even if China's economic growth dips below 7 percent, the country won't have considerable unemployment," Peng noted.

A wave of reform measures have been announced since the new leadership took office earlier this year.

The State Council's July 5 announcement of 10 guidelines on financial support for the restructuring, transforming and upgrading of the economy was the latest move showing the new government's resolution to carry out long-term reform.

On July 4, the Ministry of Finance also announced the expansion of a trial scheme allowing the direct sale of bonds by local governments, increasing the number of governments permitted to join the scheme to six from the previous four.

East China's Jiangsu and Shandong provinces were the two regions added to the pilot program, which analysts believe may help relieve risks associated with local government debts.

More reform measures are expected to be unveiled at the Third Plenary Session of the 18th Central Committee of the Communist Party of China, which is expected to be held in October this year.

But some economists said all the efforts made by the new leadership have not been enough so far.

The July 5 guidelines did not address the issue of the exaggerated real effective exchange rate of the yuan, which is also responsible for channeling cash flows away from the real economy, said Lu Zhengwei, Shanghai-based chief economist with Industrial Bank Co.

Global Times