Print

Mail

wiki links

Lehman Brothers predicts China may face difficulties

Much as China needs a macro-economic overhaul the likelihood of this looks slim. Lehman Brothers therefore has boosted the probability of a hard economic landing to one-in-three, the investment bank said yesterday.

"China needs to overhaul its macro policies in the direction of a flexible exchange rate, much higher interest rates and a more expansionary fiscal policy," Lehman Brothers' economist Rob Subbaraman said in a report released yesterday.

Unless it does, the cycle of excess liquidity and over-investment stands to continue and lead to a worse buildup of problems in the run-up to the Beijing Olympics in 2008, leaving the economy with chronic oversupply afterwards, he said.

Citing that quite a few countries have experienced sharp slowdowns the year after hosting the Olympic Games, the economist said even before the Beijing Olympics, China's economy is at risk of a hard landing if global demand for its exports weakens, or if the low quality of economic growth triggers more social unrest.

Since they perceived no sign of China overhauling its macro policies, Lehman Brothers chose to shade its forecast for the Chinese yuan to 7.70 against US$1 at this year-end, down from 7.50 previously.

The investment bank also raised the possibility of China's GDP growth slowing to 5 percent or less in the next three years to one-in-three, up from its previous probability of one-in-four in the next five years, Subbaraman said.

China's economy is booming with official GDP growth of 10.3 percent year-on-year in the first quarter and the momentum is expected to continue this quarter.

But China's economy is unbalanced with rapid growth that lacks quality. Excessive investment and insufficient consumption have left the economy unbalanced and increasingly dependent on exports to avoid a chronic oversupply problem, Lehman Brothers said.

Chinese households remained avid savers and their consumption as a share of GDP fell to just 38 percent last year, while exports soared to 37 percent of GDP last year from 26 percent in 2000, Lehman Brothers said.

To prevent economic bubbles, China introduced a series of tightening measures in 2003 that have become less effective over time.

Beijing introduced more tightening approaches to curb the robust property market earlier this week and may take further action to restrict investment in auto manufacturing this month, after it has adopted several measures in recent months, like lending rate hikes by 27 base points to 5.85 percent and imposition of a 20 percent capital gains tax on sales of second homes.

These measures are piecemeal and rely too much on administrative tools to manage an economy which is increasingly market-oriented and integrated in the world economy, Subbaraman said.
This story has been viewed 1840 times.