China's Q2 economic growth may hit 7.6%

China's economic growth is expected to fall to 7.6 percent in the second quarter before rebounding to 8.2 percent three months later, Bank of China Ltd forecast in a quarterly report on Thursday.

"Currently the economy is struggling at a dividing line between 'somewhat cold' and 'too cold'," said Zhou Jingtong, a senior economist at the bank's Institute of International Finance.

He said a "comfortable" zone for Chinese economic growth is between 8.5 percent and 9.5 percent, where the economy operates well with sound employment.

Although growth will rebound, "the short-term economic rebound may only be a result of policy stimulus" and does not imply there is independent growth in China's economy, the bank said in the report.

Growth in China's economy slowed to 8.1 percent in the first quarter, the weakest in nearly three years. And the HSBC Purchasing Managers' Index fell to a 39-month low in June, indicating that the economy is still contracting.

The official PMI may drop to 49.8 this month, falling below the dividing line of 50 between expansion and contraction, according to a survey conducted by Bloomberg. The figure is scheduled to be released on July 1.

Market fears increased on Thursday as the Shanghai Composite Index fell for a seventh day, losing 1 percent to 2,195.84 at the close and adding to a 7.4 percent loss for June.

"It would be normal in the future for China to witness insufficient demand, and the annual economic growth rate will fall to about 8 percent from the double-digit rate of previous years," Zhou said.

"Eight percent GDP growth was considered necessary to create enough jobs. However, with China's shifting demographics, that benchmark should shift as well," said Louis Kuijs, a Hong Kong-based project director at Fung Global Institute, noting that the mainland's working age population is growing at an annual rate of 0.5 percent, one-third of what it was a decade ago.

While GDP growth loses steam, the inflation rate will continue to fall as CPI declines to around 2 percent in the third quarter, leaving more room for loosening measures to shore up the economy, the bank's report said.

But it said the possibility of a stimulus package, on par with the 4-trillion-yuan ($586 billion at the exchange rate then)program in 2009, is "very small".

It said the stabilization of growth should put more emphasis on tax abatement. "For example, the taxation threshold for individuals should be increased to 5,000 yuan ($793) from the current 3,000 yuan, and measures should be taken to accelerate the pace of replacing the sales tax with a value-added tax.

"Until a month or so ago, the government largely resisted calls for major policy easing or a new stimulus. It did so because the deceleration of growth in China's economy was gradual, with no signs of a hard landing. However, following the release of especially weak economic data for April, the government has started to shift course," Kuijs said.

The government has already pledged to make "stabilizing economic growth" its top priority and cut interest rates for the first time since 2008. It has lowered reserve requirements for banks on three occasions since the fourth quarter of last year to improve market liquidity. The bank forecast there would be one or two additional reserve ratio cuts in the coming months.

And banks have been encouraged to lend more. Commercial lenders are likely to extend 650 billion yuan per month on average in the third quarter, and throughout the year new yuan lending will probably stand at 8.2 trillion yuan, the Bank of China report forecast.

The government has also started to speed up its approvals of investment projects, including infrastructure and large new steel plants, and introduced subsidies to stimulate the consumption of energy-saving household products.

"The future is inherently uncertain, and the outcome may well turn out to be weaker than the forecasts. For instance, the eurozone crisis may intensify further. But such risks call for flexibility and readiness to act when needed rather than an upfront expansionary policy," Kuijs said, adding that if growth supporting measures are deemed necessary, pure fiscal measures financed by central government debt are preferable to another stimulus based on bank lending.