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Vigilance urged on crisis impact

A senior mainland economist has called on Beijing to be 'cautious and well prepared' for the impact of the United States subprime crisis on the world's fourth-largest economy.

'No one knows when this crisis will really end and therefore as a major trading partner of the US we should be vigilant. We should take the necessary measures to protect our own interests while minimising subprime losses,' said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

Among many sectors likely to be affected by the subprime crisis, the mainland's financial sector might be hardest hit because its losses were 'likely to rise as the situation worsened', Mr Yu said at a forum in Hong Kong yesterday

He said subprime-related write-offs at lenders such as the Bank of China and Industrial and Commercial Bank of China had reached about US$9 billion.

'Our exports will also be hurt as a weakening US economy drags down domestic consumption and imports,' Mr Yu said. The US is the mainland's second-largest export market, behind the European Union.

Mr Yu expects the impact of the subprime crisis to affect the mainland's foreign reserves as the US dollar continues to fall.

Although the mainland's foreign reserves totalled about US$1.6 trillion, the weakening US dollar had effectively devalued 20 per cent since 2002. 'And what's worrying is that this trend is not likely to stop in today's environment,' Mr Yu added.

Separately, he thought that the mainland's inflation might stay high for the next few months because fixed asset investment in sectors such as property was still rising faster than the gross domestic product.

'But from a long-term perspective, the government should be able to push inflation down to its target rate or around 4.8 per cent while maintaining stable GDP growth at 8 to 9 per cent this year,' Mr Yu said, declining to make any further forecasts.

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