China's World Trade Organisation entry will drive down the profits of many protected domestic industries despite its positive long-term impact, according to UBS Warburg. Product life-cycles would be shortened as companies competed to launch models because of over-investment brought about by deregulation, said Vincent Chan, head of China Economics and Strategy. 'Deregulation will have a major impact . . . the prospect of a huge open domestic market will lure foreign direct investment into China, which will in turn intensify competition and reduce the product life-cycle of many industries,' Mr Chan said. 'Long product life-cycle industries, in general, are very stable and yield high returns. [With] short product life-cycle industries, their profitability can be diverse . . . the volatility of the profitability of corporations in China will increase and their profit will go down because of the increasing competition.' Industries such as personal-computer manufacturing and retailing were less likely to be affected, because there was already strong competition. However, industries well-protected by regulations, such as banking and car manufacturing, would be hit hardest. 'Banking and automobiles will be worst hit as they are most pressured to transform in preparing for competition,' he said. 'In the long run, you need this competition to improve domestic efficiency, although revenue may go down first.' Mr Chan also expected increasing numbers of foreign banks to acquire small- to medium-sized domestic lenders, to gain a foothold in the mainland. He said it was quicker for foreign banks to acquire small banks than to open a branch. It was also easier for them to handle the business, as small banks had smaller assets and less staff. 'Asset size is smaller . . . which means that you can afford a mistake in such a transaction. But if you have a big transaction, you can't afford this mistake,' he said. Mr Chan expected China's growth to be 7 per cent to 8 per cent until 2005. This would be led by an increase in foreign direct investment and exports, expected to see tremendous growth with the abolition of quotas. Meanwhile, UBS Warburg global sector strategist Julie Hudson said she expected there would be a moderate recovery in world economies next year. 'What happened next depends on the type of recovery,' said Ms Hudson. 'In a synchronised recovery, cyclical sectors such as basic materials, consumer cyclicals, technology and industrials will outperform in line with earnings and the market and a little ahead of lead indicators.' She said the technology and telecommunications sectors had undergone a major correction compared with other busts. 'The tech correction especially looks more severe than others but, across sectors, prolonged weak performance has usually followed relative performance peaks.'