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China's economy set to slow down from 11.5% in 2003 to 8.2% this year, according to UBS
In 2003, UBS estimated real GDP growth in China at 11.5% - an extremely high rate both by historical measures and compared to estimates of sustainable medium-term growth which generally run from around 7% to 9%. Equally disconcerting was the fact that growth deceleration was due almost completely to an expansion in fixed asset investment, while total consumption growth momentum was flat, noted Jonathan ANDERSON, Head of Asia Pacific Economics at UBS Investment Bank, who was speaking at the UBS Greater China Conference in Shanghai.
"The authorities began tightening in earnest in the middle of 2003, and since the first quarter of in 2004 every major indicator has recorded a trend slowdown in growth, including credit, production, investment, imports," said Anderson.
"The pace of deceleration points to slower growth this year, particularly as the authorities have clearly stated that they still regard growth as too high, and that they do not plan any significant relaxation of monetary policies for the time being.
"In contrast to the previous boom-bust cycle in the early 1990s, the authorities have been relatively quick to recognise overheating pressures this time around. The Peoples' Bank of China (PBC) has used direct pressure on banks to limit credit growth, beginning with speculative property development lending in the middle of 2003, while the state planning authorities began to limit new investment approvals in the third quarter of 2003 and issued a formal 'negative' list of overheated investment sectors in April last year.
"The policies have been effective. While, initially, the tightening affected the property development and construction sectors, short term-loans to undercapitalised developers also quickly dried up, and construction activity has slowed much faster than industrial production, transport services or retail sales.
"Our forecast implies a soft landing for most sectors - growth staying near trend, profit margins coming down gradually, no sharp inventory build-up or excessive unemployment pressures," he added.
"The most common criticism of the government's policy strategy is that it relies on heavily on administrative controls and not enough on 'market-based' controls such as rate moves. We believe these concerns are overstated because much of the overheating has come from local quasi-fiscal investment projects which do not respond to market signals. At the same time, the PBC monetary policy is aimed at controlling the quantity of liquidity in the system which, in theory, is just as 'market-based' as controlling the price.
"The earliest we expect to see a change in strategy would be in the middle of this year, by which time it should be relatively easy to assess the pace of demand. We do not believe that the government will abandon investment controls even in 12 months' time, given that excess capacity should still be coming on line in targeted sectors. However, we can easily see a significant adjustment in bank lending guidance and liquidity policy by the PBC if the macro momentum takes and unexpected turn," said Anderson.
UBS's fifth annual Greater China Conference continues until 28th January and is expected to attract 600 participants. The conferences features in excess of 60 presentations and over 1,000 one-on-one and group meetings over the first three days. On the fifth day of the conference participants will have the opportunity to make participants and site visits.
Shanghai, 24 January 2005
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