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Worst yet to come for China growth: economist

A man walks across a pedestrian bridge joining two residential apartment buildings in central Beijing
A man walks across a pedestrian bridge joining two residential apartment buildings in central Beijing

By Kevin Yao and Shen Yan

BEIJING (Reuters) - Facing stiff global headwinds and a downturn in its property sector, China should cut taxes and slash banks' reserve requirements this year to underpin growth, a senior government economist said on Thursday.

Fears of a hard landing in China may have abated somewhat after recent data underscored its domestic resilience, but downward risks lie ahead and growth could hit a trough in the second quarter, said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank.

"I believe the slowing trend in China's economy has not changed," Zhu, who helped prepare the annual policy-setting economic work conference in December, told Reuters in an interview in his office in the western part of Beijing.

The central bank could cut banks' reserve requirement ratio (RRR) six times throughout 2012 -- at 50 basis points each, that would release more than 2 trillion yuan ($317 billion) to spur bank lending, he said.

The next cut could come this month, Zhu added.

In an effort to shore up economic activity, the central bank cut the RRR in November for the first time in three years, and economists expect further RRR cuts of 200 basis points throughout the course of 2012, according to a Reuters poll.

But policymakers may not pull the trigger on benchmark interest rate cuts this year, since inflation remains higher than policymakers would like, and global liquidity could push commodity prices higher, Zhu said.

"They cannot relax (policy) too much. If they relax too much, inflation could pick up," he said.

A surprising upturn in China's factory activity in January fanned hopes the world's second-biggest economy will avoid a hard landing.

That followed slightly stronger-than-expected gross domestic product growth of 8.9 percent in the fourth quarter of 2011.

DANGERS AHEAD

Zhu is pessimistic about the U.S. economic outlook, given weak consumer demand and believes Europe's debt-ridden economy will only get worse in the coming months.

He also highlighted three major dangers in the Chinese economy: a downturn in the once-hot property market, risks from local government debt and underground lending activities.

"The main concern is about the property market," he said.

China's annual economic growth could slow to 8.5 percent in the first quarter and to around 8 percent in the second, when it may start bottoming out, according to Zhu's forecast.

A Reuters poll predicted first-quarter growth of 8.2 percent and suggested that would be the low point for the year. However, full-year growth would still slow to 8.4 percent, the weakest in a decade, according to the outlook.

Sources told Reuters last month that China has set a target of 7.5 percent for economic growth this year, while keeping annual inflation near 4 percent.

But Zhu believes the economy will ultimately grow about 8.5 percent in 2012, thanks to supportive policies.

"(Full-year) economic growth cannot be lower than 8 percent as the pressure on job creation is still big," he said.

Economists typically view growth of 7 to 8 percent as the bare minimum needed to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social stability.

The government may keep its property restrictions in place this year by targeting speculative demand, but pent-up demand for housing could forestall a sharp price drop, Zhu said.

Beijing has taken an array of measures to rein in the property market -- including raising mortgage rates and minimum down payments -- to ease public discontent with rocketing home prices, a process that has made it difficult for both home buyers and developers to get bank loans.

The government will have to push through some long-delayed structural reforms, including on taxes and income, to help boost consumption, but little headway is expected this year, he said.

Still, he added, a long-anticipated widening of the yuan's current 0.5 percent daily trading band may finally happen.

($1 = 6.3067 Chinese yuan)

(Editing by Don Durfee and Ken Wills)

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