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China’s economy is at a ‘tipping point’

A man rides a bicycle passing by real estate posters in Tianjin, China.
Zhang Peng | LightRocket | Getty Images
A man rides a bicycle passing by real estate posters in Tianjin, China.

China's economy is at a "tipping point" and the property sector will determine how it lands, Credit Agricole warns.

"We are at a tipping point: either prices, sales and investment in real estate gradually recover as a result of the recent easing of administrative curbs, in which case the economy will rebound in the second half, or the real estate downturn will continue, causing a further slowdown in overall growth and threatening a crisis," Dariusz Kowalczyk, senior economist/strategist, Asia ex-Japan wrote in a report.

A housing market downturn would have widespread consequences because the real estate sector accounts for over 15 percent of China's economic output and supports some 40 other industries.

Latest housing sector data show home prices rose at the slowest annual pace so far this year in May. Average new home prices in China's 70 major cities climbed 5.6 percent on year, slowing from April's 6.7 percent rise. In month-on-month terms, prices dropped 0.2 percent – the first fall in two years.

Read MoreChina's May home prices rose at slowest pace this year

"Real estate is showing some early signs of bottoming out but remains the economy's weak spot," Kowalczyk said.

The government began to loosen its grip on the market recently, however it remains to be seen whether its policy easing will prevent a deeper slowdown.

In mid-May, the People's Bank of China's (PBOC) call on the nation's major lenders to give priority to first-time home buyers when allocating credit, marked a policy shift for the government which has been on a near-five-year tightening campaign to cool the market.

Read MoreChina's fine-tuning still has big impact

Credit Agricole's central scenario is that the economy will grow 7.3 percent in the second quarter, and gradually pick up during the second-half to achieve annual growth of 7.4 percent, helped by Beijing's recent "mini stimulus" package.

"Most likely this will be possible without a rate cut, but the odds of a reduction are around 40 percent," he said.

The economy grew by 7.7 percent last year, and the government expects it will grow by 7.5 percent this year.

(Read MoreChina c.bank targets rural sector in reserve requirement cut)

This week, the People's Bank of China extended a recent reserve requirement ratio (RRR) cut for small banks to larger national lenders including Ming Sheng Bank, China Merchant Bank, Industrial Bank, and Bank of Ningbo in an effort to bolster growth without unleashing broader stimulus.

Beijing's targeted stimulus measures appear to be paying off as recent economic data points to stabilization in growth.

May retail sales, for example, rose 12.5 percent on year, above analyst expectations for a 12.1 percent increase. Fixed asset investment rose 17.2 percent on year for the January-to-May period, just above expectations for a 17.1 percent rise.

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