People walk past a public welfare poster outside a construction site in Beijing's central business district on Monday. China's resolve to revamp its economy for the long-term good will be tested this month when a slew of data shows growth is grinding towards a 23-year low. The words on the poster read, "Chinese Dream, My Dream". Jason Lee / Reuters

The International Monetary Fund cut its forecast for China's economic growth this year and next, and believes slowing expansion across big developing countries - tied to expected changes in US monetary policy - will hinder performance of the global economy.

"My impression is the country where there is the largest risk in terms of large decrease in growth is China," IMF chief economist Olivier Blanchard told a news conference on Tuesday about the Fund's latest quarterly World Economic Outlook.

The Fund forecast 7.8 percent GDP growth for the world's second-biggest economy in 2013 and 7.7 percent in 2014 - a reduction of 0.3 and 0.6 percentage points, respectively, from its April report.

For the global economy, the IMF now sees 2013 growth of 3.1 percent and 2014 growth of 3.8 percent, both down 0.2 percentage points from the forecast three months ago.

Among the 17 countries that use the euro currency, the IMF expects economic contraction this year of 0.6 percent before rebounding in 2014 to 0.9 percent growth. The first figure is worse and the second better than the Fund's April euro zone forecast of contraction this year and next of 0.2 percent and 0.1 percent. The advanced economies of Japan, Canada and the UK were among the few upgrades in the latest outlook.

A key to the lowered projection is a slowdown in the major emerging-market nations known as BRICS - Brazil, Russia, India, China and South Africa.

"It's clear that these countries are not going to grow at the same rate as before the crisis," Blanchard said in earlier remarks that accompanied Tuesday's report.

In decreasing its forecast for all five BRICS nations, the IMF cited factors particular to each, with "unproductive investment" the culprit in China, Blanchard said, alluding to an imbalance between investment and consumption.

China is in the midst of reforms, which its new leadership has promised to continue, aimed at moving the economy from a growth model reliant on trade and investment to one that emphasizes consumer demand and spending.

A major challenge in this transition is "shadow banking", a system of largely unregulated lending that has surged since the global financial crisis, when Chinese banks raised interest rates and restricted access to loans. The PBOC, China's central bank, has taken steps recently to free up credit and reduce the chances of financial instability by injecting liquidity into the banking system and warning banks to account for off-balance-sheet loans.

Across all emerging economies, the BRICS included, the IMF downgraded growth projections by 0.3 percentage points for both this year and next, to 5 percent and 5.4 percent, respectively.

If, as many economists and analysts expect, the US Federal Reserve acts later this year to begin unwinding its bond-buying program known as quantitative easing, the BRICS and other emerging economies could be hurt.

Results may include less growth and tighter credit as investors steer capital to US markets in anticipation of bigger returns due to interest-rate increases spurred by the Fed's tapering of its unorthodox "QE" stimulus. The program has pumped over $2 trillion into financial markets since soon after the crisis began in late 2008.

Concerns over the impact of looser Fed monetary policy will be among many topics Chinese and US officials discuss at their fifth Strategic and Economic Dialogue on Wednesday and Thursday in Washington. Fed Chairman Ben Bernanke is scheduled to participate in S&ED "economic track" sessions, which will include representatives of some 30 government agencies from both sides.

Senior officials in US President Barack Obama's administration wouldn't speculate about what the central banker might discuss with the Chinese delegation, which will include Bernanke's counterpart, People's Bank of China Governor Zhou Xiaochuan.

"Chairman Bernanke will be in the sessions, and I expect that he will address questions that are asked to him," one administration official said in a Monday conference call previewing the S&ED.

For the US, the IMF on Tuesday lowered growth forecasts to 1.7 percent and 2.7 percent in 2013 and 2014, from 1.9 percent and 2.9 percent in April.

It blamed the still-weak American recovery on the lingering effects of federal budget cuts known collectively as sequestration.

Still, signs of a self-sustaining US recovery without extraordinary actions by the Fed are "fundamentally good news" for the global economy, the IMF's Blanchard said, although he warned of "volatility" along the way.

"Interest rates will go up only if growth is strong enough," he said. "If we see an increase in interest rates, it means that growth is stronger in the US and that's good for all the countries in the world. It increases exports; it helps other countries."

josephboris@chinadailyusa.com

(China Daily USA 07/10/2013 page2)