China's gross domestic product (GDP) growth could slide below 7 percent in the second half of the year, warned Nomura, highlighting that downside risks to the world's second largest economy's outlook have risen "significantly" in recent weeks.
Tighter liquidity conditions and minimal support from policymakers, coupled with weakness in external demand, pose a threat to the country's growth trajectory, according to Zhiwei Zhang, chief China economist at the investment bank.
Nomura has assigned a 30 percent probability to the scenario unfolding, noting that its current base case is for growth to slow to 7.4 percent in the third quarter and 7.2 percent in the fourth quarter.
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"Official total social financing has tumbled in recent months. We believe the series of policy tightening measures applied to the shadow banking sector in the past three months has reached a critical mass, such that deleveraging in the banking sector is happening," said Zhang.
"Liquidity tightening can be very damaging to a highly leveraged economy. Many local government financing vehicles rely on new debt issuance to pay the interest on their outstanding debt because they are operating-cash-flow negative," he added.
Total social financing, a broad measure of liquidity in the economy, fell to 1.2 trillion yuan ($195 billion) in May from 1.7 trillion yuan in April and 2.5 trillion yuan in March, according to Nomura.