Economy to slow in short term, report says

Slightly better-than-expected economic performance in October points to positive growth in the near term, although the momentum likely peaked in the third quarter, J.P. Morgan said in a report on Thursday.

The benign economic outlook provides favorable conditions for structural reforms, the banking and financial-services provider said.

The Third Plenary Session of the 18th CPC Central Committee, which concluded on Nov 12, outlined an ambitious reform plan for the next five to 10 years.

On the economic front, priorities include administrative, financial, fiscal, land and resource-pricing reforms.

The report emphasized that the market should play a "decisive" role in resource allocation (vs. the previous language of a "basic" role).

Going forward, the implementation of policy will be the key to success, and concrete details and timelines are crucial going into 2014 and beyond, the report said.

While reforms will be good for long-term growth, certain items (for example, actions dealing with overcapacity and financial imbalances) will be a drag on economic growth in the near term, the research showed.

"To that end, we believe this round of recovery peaked in the third quarter (at 9.1 percent quarter-on-quarter) and that growth momentum will soften in the coming quarters," said Zhu Haibin, J.P. Morgan China’s chief economist.

"Our full-year forecasts for GDP growth stand at 7.6 percent for 2013 and 7.4 percent for 2014," Zhu said. "In the near term, we expect the government will maintain proactive fiscal policy (modestly easing it) and neutral monetary policy."

The bank expected no change in policy rates and reserve requirement ratio. And "credit tapering" — where credit growth slows but remains much higher than nominal GDP growth — will continue.

"In addition, we expect that regulators will strengthen rules and supervision on speculative financial activities in shadow banks and interbank assets, which may lead to a more cautious attitude on the part of financial institutions in interbank and credit markets," Zhu said.

In the next three to six months, financial reform may make further progress, illustrating the determination of China’s new leadership to follow through with structural reforms. Likely policy actions include the introduction of negotiable certificates of deposit products, approval of privately owned banks, widening of the daily trading band for USD/CNY from 1 percent to 2 percent and the introduction of a deposit-insurance scheme.