Morgan Stanley cuts China growth forecast to 8.5%

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Morgan Stanley announced Monday it has adjusted forecast of China's gross domestic product (GDP) growth to 8.5 percent this year from the earlier forecast of 9 percent as a result of worse-than-expected slowdown in the first four months and later-than-expected policy easing.

The latest forecast came as China's first-quarter GDP growth hit a near-three-year low of 8.1 percent and data in April continued to suggest downside risks for the economy.

Given the circumstances, Morgan Stanley said it is hard for China to achieve the previously anticipated 9 percent growth, but they remain bullish on the macro outlook on intensifying policy easing moves.

"With more policy measures streaming in, we believe China's GDP growth has now troughed and will accelerate noticeably in the third and fourth quarter this year," said a statement by Morgan Stanley.

It expects more aggressive policies to support demand growth, especially if growth weakens further and the external environment deteriorates.

"Our call is essentially that the central bank will cut both lending and deposits benchmark interest rates twice this year, each by 25 basis points," it said.

Meanwhile, Morgan Stanley said the government will likely release more government-led infrastructure investment and SOE-led manufacturing investment projects, before gradually relaxing demand controls in the property market.

It raised GDP forecast in 2013 from 8.6 percent to 9 percent as it expects the positive effects of policy stimulus to spill over into next year.