Brokerage pessimistic about growth, inflation prospects

DBS Securities has painted a bleak outlook for the mainland economy, saying growth will slow down and inflation will come back to haunt the mainland in the second half of next year.

The brokerage's chief economist, Chu Siu-wah, yesterday said he had marked down the mainland's economic growth forecast next year to 7.8 per cent from 8.2 per cent and in 2000 to 7.5 per cent from 8.5 per cent.

This year, he expected growth of 7.6 per cent, below Beijing's official 8 per cent target.

Mr Chu said the economy would recover on the back of an expansionary fiscal policy which saw the state embark on an investment spree.

He described it as 'a quasi recovery' because it would only last for six to nine months, as private consumption would continue to lag behind.

Mr Chu said growth would also be dragged down because the state had decided to earmark more resources for the primary sector, such as agriculture, which was characterised by high investment but low return.

In addition, he foresaw a sharp economic slowdown in Guangdong and Fujian, which used to be among the most rapidly developing provinces.

However, the coastal region would remain the growth engine of mainland economic growth, as foreign investors were reluctant to invest in less prosperous inland areas.

Mr Chu also cited unsustainable fiscal stimulus, falling foreign-direct investment and subdued private-fixed asset investment, and a shrinking trade surplus as reasons for the weakening economy in the second half of next year.

He expected the economy to grow at an annualised rate of 8.8 per cent in the first quarter of next year, 8 per cent in the second quarter, 7.5 per cent in the third quarter and 7 per cent in the fourth quarter.

Mr Chu said inflation would bounce back into positive territory in the second half of next year because of a surge in money supply this year.

'Inflation will go sideways for six months, but it will eventually come back,' he said, expecting the retail price index (RPI) to rise 1.8 per cent and the consumer price index (CPI) to add 3.5 per cent next year. This year, he said, RPI would drop 2 per cent and CPI would fall 0.2 per cent.

Mr Chu expected the People's Bank of China to shave 25 basic points off the saving rates and 50 basic points off lending rates by the end of December.

He did not anticipate further interest-rate cuts over the next two years.

He also expected the yuan to trade at 8.5 against the US dollar next year and 8.6 in 2000.