World markets seen as biggest threat to growth

PUBLISHED : Saturday, 18 December, 2010, 12:00am
UPDATED : Saturday, 18 December, 2010, 12:00am

The biggest challenge to China's economic growth next year will be shaky world markets, rather than domestic factors, say economists.

The external threats to the nation's economy are already evident in the collapse in the value of the US dollar as a result of the US administration's second-round quantitative easing (QE2) measures, which is leading to higher import prices of major raw materials, they say.

Like all other emerging-market economies, China will have to deal with rising import prices, the economists said during discussions yesterday at an annual financial conference organised by Caijing magazine.

Ma Jun, Deutsche Bank's chief economist for China, said raising the value of the yuan to reduce the impact of rising international prices on the domestic market was becoming an increasingly viable policy option.

Ma said inflation could easily cause wild fluctuations in a country's development, with many social complications. It could also exact heavy economic and social costs. He said Beijing might increase the value of the yuan and raise interest rates at the same time to curb domestic inflation.

Ma told the conference he believed that the central government would try to restrict the issue of new bank loans to below 6.5 trillion yuan (HK$7.58 trillion) next year, rather than the 7 or 7.5 trillion yuan some financial analysts predicted.

Cao Yuanzheng, chief economist at BOC International, agreed and said China is 'fully capable of bearing a 3-5 per cent rise in the yuan-US dollar rate, although whether or not the government wants to accept that change is another matter'.

But he believes an increasingly flexible yuan exchange rate will be unavoidable as new uncertainties clouded the outlook in both Europe and North America.

Ha Jiming, managing director of Goldman Sachs investment banking division (Hong Kong), said a 5 or 6 per cent rise in the value of the yuan against the US dollar was likely as a means of offsetting the impact of key commodity price rises.

Liu Shijin, Vice-Minister of the State Council Development Research Centre, listed imported inflation as one of the two major uncertainties facing the country's economy in 2011.

He said the jump in inflation in October and November, driven mainly by increased prices of farm products, had surprised the central government.

But Liu said the government was probably prepared for international crude oil prices of more than US$100 per barrel in 2011.

Liu said the other major uncertainty facing the economy was the central government's ability to control local governments' investment ambitions.

Jonathan Anderson, managing director and senior global emerging markets economist for UBS Investment Bank, said that even during the global crisis, emerging market economies continued to outperform the developed economies.

The gap between the emerging market economies and developed economies has remained as wide as before the crisis, he said.

So in the next five to 10 years, emerging market economies will continue to attract investors from around the world.

Most economists who spoke at the conference said they expected that China would achieve GDP growth of at least 9 per cent next year from this year, with Ha predicting up to 10 per cent growth.

Consumer price inflation would be at its worst in the first or second quarters and range between 5 and 6 per cent year on year.

Most other emerging market economies faced inflation that could reach double digits, they said.

Risk factors

Inflation is seen as a major threat to economic growth

Most economists at the conference expected China's economy to grow next year by at least: 9%

Two economists expected Beijing to let the yuan rise in value against the US dollar by about: 5%