The Asian Development Bank (ADB) today downgraded the expected rate of growth for the Chinese economy to from 7.2% to 6.8% for 2015 a little over three months of the year left. At the same time, it’s dropped 2016’s expected growth rate from 7% to a new forecast of 6.37%.

The ADB, which the Australian government invests in, said this was a reflection of “growth setbacks due to decelerating investment growth and weak exports.”

ADB chief economist Shang-Jin Wei said the downgrade also reflected a change in the structure of Chinese growth as it transitions away from its previous reliance of investment toward a more consumption-based economy.

“As long as the country continues to pursue pro-market reforms, there is a good chance for the PRC to realize productivity gains and relatively strong future growth rates,” Shangh-Jin Wei said.

Unlike many, the ADB explicitly says it is not expecting a hard landing in China and wrote in its latest update for the region that “export demand, tamped down by delayed recovery in the developed economies, should strengthen over the forecast period as global growth rises, and, together with robust consumption growth, cushion the impact of decelerating investment growth.”

It downgraded its inflation forecasts for this year as “as global prices for food and other commodities remain depressed,” and said the recent increase in money supply growth will support GDP.

The bank explicitly warned against more monetary easing saying:

monetary policy has to take into account the risks associated with high credit growth, which still substantially outpaces nominal GDP growth. In light of this, the need for further interest rate cuts is less compelling over the forecast period, particularly as

(i) benchmark lending and deposit rates are already close
to their historic lows after four rate cuts this year,
(ii) higher US rates are expected soon,
(iii) inflation will likely rise along with commodity prices, and
(iv) the PRC leadership has made it clear that it sees structural reform, not monetary or fiscal stimulus, as the guarantor of sustainable growth.

But that doesn’t mean that regulatory reserve requirements, still up at 18%, won’t be cut, which the ADB says will inject “liquidity in the banking system.”

The outlook is more sanguine than many might expect but the bank does note their are risks on the horizon with the principle domestic risk “is the current stock market correction possibly affecting consumption, investment, and financial stability.”

But, here again the ADB has a sanguine outlook saying, “the risk that a share price decline will engender a financial crisis is small,” because “equities account for only a small share of household wealth, with large household savings providing a buffer.”

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