The Chinese economy will pick up its pace in the second half of 2015 due to expected pro-growth measures, HSBC forecast, despite recent market volatility, lackluster manufacturing and the yuan's depreciation.
Qu Hongbin, chief China economist of the London-based bank, wrote in a research note that the economy will be on track for a modest recovery during the rest of the year, after it slipped to its lowest level since the global financial crisis.
"We maintain our full year GDP forecast at 7.1 percent," said Qu. The Chinese economy grew at the slightly lower rate of 7 percent in the first half.
Recent weaker-than-expected factory activity has aroused worry about the economy. The Caixin flash China general manufacturing PMI retreated to 47.1 in August, the lowest reading since March 2009.
A plunging stock market and a weakening yuan added to fears that the government may be running out of policy options.
However, Qu believes policymakers still have sufficient ammunition on both the monetary and fiscal fronts to prop up the economy.
Given persistent corporate funding costs and a low base money growth level, there is ample room for the central bank to roll out more monetary easing measures, he said.
Qu expects the People's Bank of China to cut interest rates by 25 basis points and slash the reserve requirement ratio by 200 basis points in the second half.
Similarly, fiscal policy also has room to be more supportive, Qu said, citing the current fiscal budget surplus, reforms in local government financing and policy banks' re-capitalization.
The untapped policy potential could put China at the top of the list of economies able to pull themselves out of deflation, without engaging in "beggar-thy-neighbor" competitive devaluation, Qu said.