Morgan Stanley raises forecast on China's GDP growth

BEIJING - Morgan Stanley has revised its forecast on China's GDP growth as it believes ongoing reforms, including excess capacity cuts, are improving the quality and structure of the economy.

The New York-based investment bank predicted the economy will expand by 6.8 percent year-on-year in 2017 -- up from a previous forecast of 6.6 percent -- and by 6.5 percent in the next year, also better than the 6.4 percent initial projection.

It attributed the bullish stance to better economic quality and progress in China's key transitions.

Robin Xing, chief China economist with Morgan Stanley, highlighted robust consumption and improving private investment during a press briefing Wednesday.

"Consumption upgrades in third- and fourth-tier cities, along with services and the new economy, will continue to create jobs and drive growth in incomes," Xing said. "Meanwhile, despite a slowing public sector, private firms have become more active in making investments, with a larger share investing in high-tech industries."

China is weaning itself from reliance on investment in commodities and infrastructure and turning to the tertiary sector and consumption to sustain growth momentum, which have grabbed bigger and still-increasing shares of the economy.

"Consumption's contribution to GDP growth will reach a new high of more than two thirds in the next year," Xing said.

Xing also cited other positive factors in China's economy, such as exports propped up by a global recovery, inflation dynamics that remain healthy with warming consumer prices and stabilizing factory-gate prices, progress in eliminating outdated capacity, and international patent applications that rank second globally.

Still, challenges exist, but Morgan Stanley said problems ranging from debt to deflationary pressures are actually improving and will remain under control.

"Policy tightening and related financial sector clean-up policies have helped to control financial risks," the bank said in a research note, pointing to deleveraging in the corporate sector and slower growth in debt.

"The pace of the increase in overall debt to GDP has moderated to 4 percentage points so far in 2017, as compared to the cumulative 42 percentage points over both 2015 and 2016," according to the note. Xing projected the debt to GDP ratio will cap by the second half of 2019.

Morgan Stanley has maintained its long-term optimism on China and expects it to avoid the middle-income trap to gain high-income status with per capita national income to exceed $13,700 by as early as 2025.