Citigroup warns on China growth

Analysts at Citigroup Inc have warned that economic growth this year might be lower than estimates, as inflation pressures restrict government efforts on further loosening in the second half.

The US banking giant predicted on Monday that China's GDP growth in 2013 will be 7.8 percent.

It expects the central bank to raise interest rates in the fourth quarter and the first quarter of next year, by 25 basis points each time, which would further drag growth to 7.3 percent in 2014.

Oliver Chiu, head of research and investment advisory in the wealth management unit of Citibank (China), said the government will set the GDP target at 7 percent, but actual growth will be between 7.5 and 8 percent.

He added that during the second half of the year, the rate of inflation based on the consumer price index could reach as high as 3.5 percent.

Citi's less optimistic forecast comes as most analysts adjusted their growth estimates upwards, following the pick-up in China's economy during the fourth quarter of 2012.

Standard Chartered Bank said on Monday it has upgraded its 2013 GDP growth forecast for China to 8.3 percent, from a flat rate of 7.8 percent.

It said it expected quarter-on-quarter growth to accelerate in the second half of this year, before cooling in the second half of 2014.

Citi's Chiu said that although China's growth will remain relatively high, the biggest risk to the world's second-largest economy is whether it can transform its economic model to more efficient, domestic-driven growth.

"If the country cannot accelerate its transition, by 2020 its growth momentum would be very questionable as basically all the necessary infrastructure construction, such as its railway network, would be completed."

Consumption contributed more to GDP growth than investment in 2012.

Last year, domestic consumption in China accounted for 26 percent of US consumption, while its investment was 235 percent of that in the US, according to figures from Citi.

Jeremy Stevens, China economist at the South Africa-based Standard Bank Group, said: "A shift in emphasis away from activity underpinned by the simple mobilization of resources - land, labor or capital - to a smarter, more efficient economy is necessary.

"Without change, the economy will simply bounce from sugar rush to sugar rush - short-term highs, with no lasting value.

"The rebound in activity since July has not convinced us of its durability."

Stevens added that China's investment-led model still has a heartbeat, but funding conditions are challenged.

In addition, "non-performing loans in the banking sector will rise sharply and the sector will under-perform, hurting the growth prognosis further".

Citi's report added that exterior demand is unlikely to show any substantial improvement this year, with growth in both exports and imports remaining single digit.

It said the global economy will grow by 2.6 percent this year, and 3.1 percent in 2014, and that any global rebound to the levels before the economic crisis of 2007-08 is unlikely before 2015.