The Bank of China

Bank of China forecast positive over soft landing

PUBLISHED : Wednesday, 21 December, 1994, 12:00am
UPDATED : Wednesday, 21 December, 1994, 12:00am

THE Bank of China is positive about Hong Kong's economic growth in 1995, predicting a six per cent economic growth based partly on the conviction that China is heading for a soft landing.

The forecast represents the most optimistic picture painted by Hong Kong's note issuers so far, as both Hongkong Bank and Standard Chartered envisage a cautious 5.8 per cent gross domestic product growth.

The Bank of China rejects the caution about mainland economic reform believing it will have a positive effect: 'The chance of realising a soft landing in China is very high.' Its quarterly report, the bank says macroeconomic reform will continue and to control inflation, Beijing will tighten infrastructural investment, consumption expenses of state-owned enterprises and restrain excess credit growth.

'The government will strike a balance between economic adjustment and development . . . as such, it is estimated that the Chinese economy will have a successful soft landing and not wild fluctuations,' the Bank of China Group report says.

That means China's overheated economy will steadily slow down to a reasonable, yet high, level. Spiralling inflation will also come down substantially, it says.

The report is confident about the way the Chinese Government will handle the delicate relationship between economic reform, development and stability.

Furthermore, it says that China will be admitted to the World Trade Organisation with its founding member status re-affirmed.

'Under these circumstances, the China market will open up further. The trade environment will improve. Import and export and foreign investment will increase accordingly,' the report says.

The confirmation of China's Most Favoured Nation status and its de-linking from human rights has also helped remove the uncertainties hanging over the trading environment.

Consequently, Hong Kong's exports to China would resume its growth trend with a much bigger increase in re-exports.

With all the positive factors propelling economic growth, Hong Kong may lose out a bit on inflation. Compared to the 8.5 per cent estimate of the other two banks, Bank of China's nine per cent is much higher.

Apart from the frequently quoted reasons of domestic resource constraints and rising rentals, the report blamed a fiscal deficit for higher inflationary pressure.

'It is expected that the upcoming financial budget will be in deficit. A deficit budget will trigger a rise in prices,' the report says.

Commodity prices around the world had risen drastically this year and the impact would be filtered through to finished products.

'It is estimated that the commodity price of retained imports will continue its rising momentum,' the report said.

Nevertheless, all three big banks concurred there would be another year of steady growth because of a domestic investment spree and an export-driven boom.

Although domestic consumption partly will be suppressed by rising interest rates, the strong growth momentum will come from the airport projects and increased allocation for building residential flats.

The report expresses concern about the impact of the Legislative Council elections next year.

'If the elections lead to internal dissent in the society, that would have impact on consumption and investment,' the report says.