Policy flexibility key to sustained growth

As China adjusts its economic structure, there is a risk that the nation's GDP growth will fall below 6.5 percent at times during 2015, a report by the International Monetary Fund has said.

The multilateral lending agency said that China would need to "calibrate" its macroeconomic policies in such a manner that it can effectively manage the economic slowdown and keep GDP growth at around 7 percent－the annual growth target, and give further impetus to reforms that focus on restructuring, the report said.

"The policies need to mitigate the tightening bias, instead of reversing the reform course," said Alfred Schipke, chief representative of the IMF in China.

Inadequate progress in reducing vulnerabilities and advancing reforms remains the key risk in the world's second-largest economy, he said. "It is crucial to find the right balance to contain vulnerabilities, advance reforms and avoid a sharp slowdown."

During the first quarter, GDP growth in China slipped to a seven-year low of 7 percent, down from the 7.3 percent recorded in the fourth quarter of 2014. The growth was in line with the IMF forecast, although the pace slowed a lot in the first three months, it said.

Some economists had suggested that the growth rate would decline further in the second quarter and dip below 7 percent, as production indicators remained soft and fixed-asset investment remained flat. The National Bureau of Statistics is expected to release the key economic indicators for April next week.

The agency said that China should maintain its prudent monetary policy and proactive fiscal policy. The People's Bank of China, the central bank, has cut the benchmark lending rate by 65 basis points since late November 2014 and the reserve requirement ratio by 150 basis points since early February this year.

Experts anticipate that the monetary easing measure might have released more than 1.8 trillion yuan ($290 billion) in base money liquidity.

In addition, the most recent monetary easing was the announced expansion of the Pledged Supplementary Lending facility to policy banks, through which the central bank will provide liquidity to the China Development Bank to increase its lending to infrastructure projects and other government-supported investment.

There is still room for the government to further ease monetary policy, maybe by using different facilities rather than lowering interest rates and RRR, said Schipke. "But I don't think it is similar to the quantitative easing measures which have been taken by many developed economies."

The IMF report expects the real estate sector will continue "an orderly multi-year adjustment". This year, real estate investment may decrease 4.2 percent from 2014, which may trim the overall GDP growth by 0.38 percentage point.

Policymakers should also ensure medium-term labor market flexibility and resilience by implementing reforms, it said. Wei Benhua, former executive director for China in the IMF, said that "China is fully aware of the potential slowdown risk. A slower growth rate is inevitable during the restructuring process."