SINGAPORE (Oct 5): Giant Japanese investment banking group Nomura today drastically cut its GDP growth forecasts for China to 5.8% for next year from 6.7% earlier forecast. Nomura still believes the world’s second largest economy will be able scrape through 6.8% growth this year based on data for the first nine months of year.

The Chinese economy is slowing far more sharply than anticipated, says Yang Zhao, Nomura’s Hong Kong-based China economist, in part because of faster-than-expected pace of economic rebalancing. China has been trying to remake itself from export-led manufacturing model to a domestic consumption-based model. “The main drag is slowing property investment growth, which may turn negative and in turn drag fixed asset investment growth down to single-digit levels in 2016,” Zhao says in report published this morning.

Nomura expects Beijing to step up spending on infrastructure investment, with the official fiscal deficit rising to 3.0% of GDP in 2016 and policy banks leveraging up further to finance infrastructure projects.

“Monetary policy should remain accommodative in 2016 and we expect four 50bp cuts to the bank reserve requirement ratio (or RRR)and two 25bp benchmark interest rate cuts,” Zhao says in his report. “We see rising employment pressures and financial risks further down the road, but do not believe China is experiencing a hard landing as systemic risk remains controllable,” the report adds.

Zhao notes that “high leverage and overcapacity in the economy have blocked the transmission mechanism of monetary policy to stimulate investment growth in the private sector.” Yet, he notes, Beijing  seems reluctant to launch a strong stimulus package.

“A moderate effort will be unable to fully offset the slowdown of the economy,” he says.

In a separate China equities strategy report this morning, the Japanese investment bank argues while investor’s current conviction in Chinese stocks is low because it has only just starting to recover from a crisis mode in July and August, there may be value emerging in the market.

Among its top picks are BMW’s China assembler Brilliance China Automotive Holdings, automaker Great Wall Motors, Industrial & Commercial Bank of China or ICBC, life insurance behemoth China Life, brokerage Huatai Securities, China Telecom, networking and telecom equipment firm ZTE Corp., property firms Greenland and CR Land and construction machinery and heavy equipment giant Zoomlion.