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China should be ready for "extreme risk" to economy: think-tank

world Updated: Mar 22, 2012 11:21 IST

China should be ready to cope with "extreme risks" in the economy from a sharper global downturn, although the country is on track to grow a healthy 8.5% this year, a senior economist at the cabinet's think-tank said on Thursday.

China's economy faces "a combination of shrinking short-term demand and falling long term potential productivity", Yu Bin, director of macro-economic research department of the Development Research Centre (DRC), told a news conference.

"We should have emergency plans to respond to extreme risks," he said.

He predicted the economy is likely to grow 8.5% in the first quarter from a year earlier and expand at the same rate for the full year, so long as there is not another major global financial crisis and China's property market is stable.

Still, financial markets are showing some concern about a slowdown in growth. The country's manufacturing sector activity shrank in March for a fifth successive month, the HSBC flash purchasing managers index showed on Thursday.

Slower growth will help cool consumer inflation, which is likely to be below the government's annual 4% target, Yu said, although rising global oil prices could have some upward impact on inflation.

Annual inflation cooled sharply to a 20-month low of 3.2% in February, but Chinese policymakers are particularly sensitive to elevated commodity prices, given China's huge imports of raw materials.

"Overall, we believe prices of major commodities, including oil, will hover at high levels this year and the possibility of persistent and sharp rises is small," he said.

"There is room for monetary policy adjustments as inflation pressures ease and considering the need to maintain steady and relatively fast economic growth," he said.

Yu added that there is room for China to cut banks' reserve requirement ratio (RRR) further to support growth, but the pace of such policy changes will hinge on the inflation outlook.

The RRR was at a record high of 21.5% before the central bank called a halt to a near two-year long policy tightening campaign in November, cutting the rate by 50 bps. It followed it with another 50 bps cut in February.

The yuan, which has been allowed to rise 3-5% per year, will continue to rise as long as China's economy remains sound, Yu said, expecting two-way currency swings.

China could double the daily trading range allowed for the yuan currency as soon as the second quarter and cut 150 basis points more from bank reserve ratios this year to boost credit growth as the world's second-largest economy slows, a Reuters poll showed.

China's average economic expansion is likely to slow to a range of 7% to 8% in coming years from about 10% in the past 30 years as the country's potential growth rate declines along with structural shifts in the economy, Yu said.