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Just How Low Will China Allow Growth to Go?

Beijing, China
Sam Diephuis | The Image Bank | Getty Images
Beijing, China

As weak economic data fan concerns about the outlook for the world's second biggest economy, just how much of a slowdown in growth is Beijing willing to tolerate before it steps in?

So far Chinese policymakers appear happy to allow a lower level of gross domestic product (GDP) growth as the economy shifts away from a dependence on investment and exports, but their resolve could be tested as economic conditions worsen.

(Read More: Why China's Economy May Be Heading for a Crash)

China's full-year growth was 7.8 percent in 2012 and the government targets growth of 7.5 percent for 2013, which would be the slowest in 23 years, according to Reuters.

"The question is how low can we go and that depends on the pain threshold for Chinese politicians," said Chi Lo, senior strategist for Greater China at BNP Paribas Investment Partners.

"From what I understand, they [policymakers] talk about 7-7.5 percent as the range of growth that the authorities are willing to tolerate. So if we see economic growth slow to 7.2 to 7.3 percent we may see a shift towards [monetary or fiscal] loosening to make sure we don't slip below 7 percent," he added.

(Read More: China Remains Stuck in Decline, Data Will Show)

Data on Wednesday showed exports fell 3.1 percent in June from a year earlier, the first decline since January 2012, reinforcing signs of a slowdown.

A spike in short-term interest rates to record highs last month that economists say could spill over into the real economy through higher lending rates has also fueled worries about China's economic outlook.

Guessing Game

"It's a guessing game in the market and policy uncertainty has been on the rise, especially after the inter-bank market episode in June," Stephen Schwartz, chief economist for Asia at BBVA Research, told CNBC in response to a question about how low Beijing would allow economic growth to fall to before considering stimulus measures.

"So nobody knows for sure except the authorities. Our own view is that, they will try and stick to the 7.5 percent target this year. The real uncertainty is what the targets will be for next year," he told CNBC Asia's "Squawk Box."

China releases its second-quarter GDP data next Monday and economists polled by Reuters forecast annual economic growth at 7.5 percent, down from 7.7 percent growth in the first quarter.

The International Monetary Fund on Wednesday downgraded its global growth outlook and said one of the main risks facing the world economy is slower-than-expected growth in China.

(Read More: IMF Flags Top Three Threats to Global Growth)

"We have seen a higher tolerance for lower headline growth as the focus shifts towards structural reform and rebalancing the economy, so I think the government would tolerate growth below the 7.5 percent target, but they have also shown a commitment to economic stability," Fan Cheuk Wan, managing director and head of research at Credit Suisse Private Banking said.

According to Schwartz of BBVA Research, the labor market could be the key to determining how much of a slowdown in the economy Beijing is willing to tolerate.

"As long as growth stays above 6 percent, that should give some comfort to the government that the labor market should stay stable and that social risks won't be a problem," he added.

—By CNBC's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

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