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Asian Development Bank’s Forecast for China’s Economic Growth Worsens

China’s economic activity has been weaker than expected this year, with fewer exports and lower investment growth, and now the Asian Development Bank (ADB) says the country won’t make its 7 percent growth goal for the year—though even that rate of expansion would be China’s most feeble in a quarter century.

Gross domestic product (GDP) growth in China is now forecast to average 6.8% for the year.

In its Asian Development Outlook 2015 report released Tuesday, ADB trimmed its growth forecast for China to sub-7 percent from an earlier 7.2% projection, and in 2016 that number is expected to fall further to 6.7%.

“In addition to less favorable demographics and higher wage costs, the PRC’s [People’s Republic of China] adjustment to a new growth model that is based more on innovation, consumption, and services will bring with it more moderate growth,” ADB chief economist Shang-Jin Wei said. “As long as the country continues to pursue pro-market reforms, there is a good chance for the PRC to realize productivity gains and relatively strong future growth rates.”

China’s labor markets are still healthy and retail sales in July and August showed no significant downward trend. Consumption in the country remains “robust” according to the report, contributing 4.2 percentage points to GDP growth in the first half of the year.

The government’s efforts to stimulate the economy, including cutting benchmark interest rates and regulatory reserve requirements have so far been a boon for liquidity and are expected to continue to aid the economy.

Southeast Asia so far seems to be suffering the most from China’s slowdown—which is one of the region’s key markets—and from depressed demand from major industrial economies. Growth there will fall to 4.4% in 2015 but bounce back to 4.9% in 2016, the bank noted.

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Softer growth prospects in both China and India weighed on Asia overall and ADB cut the region’s GDP growth forecast to 5.8% this year—down from the previous 6.3% forecast for both nations. For 2016, growth will also be a lower-than-expected 6 percent. Vietnam, however, will see the fastest growth as private consumption has been “buoyant,” as has foreign direct investment ahead of the Trans-Pacific Partnership (TPP) trade agreement.

India’s growth prospects are dependent on a pick up in external demand and progress on structural reforms. ADB forecast growth there down 0.4 percentage points to 7.4%, but expansion is expected to pick up, reaching 7.8% in 2016 when certain economic reforms come to fruition.

“Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows,” Wei said. “In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macroprudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.”

According to the report, those headwinds could “further abrade the region’s growth path.”

The strengthening U.S. dollar could make Asian companies with foreign debt come up short, the bank noted. Those with high foreign currency exposure and little foreign currency revenues will likely face pricier debt service costs.

“To counter the impacts of a U.S. rate rise, monetary policy authorities in developing Asia will need to find a balance between stabilizing the financial sector and stimulating domestic demand,” the report said.