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UBS: No economy-wide bubbles
( 2003-10-08 08:35) (China Daily)

China has no economy-wide bubbles at present and the need for high growth remains strong to create jobs, accommodate further urbanization and facilitate additional reforms, says investment bank UBS.

"Is China in for a hard landing?" Joe Zhang, the bank's China economist, said in a report released last week. "We believe the choice for policymakers is high growth or very high growth."

China's economy continued to expand by an enviable 8 per cent in the first half of the year amid global sluggishness. But signs of excessive investment in such sectors as real estate and autos as well as rapid loan rises have led to fears about inflation and an overheating in the economy.

After announcing inspections into rapid loan increases this year, the central bank raised the bank reserve ratio last month - to 7 per cent from 6 per cent - to slow down the growth of money supply.

"If there were many bubbles in the economy, why did they not show through inflation rates and rising interest rates, wages, or asset prices?" Zhang said.

"At present, China does not have inflation and interest rates are stable (except the bond yield hike caused by the lifting of the bank reserve ratio)."

China's consumer price index growth, after months of being in negative territory, started to rise in October last year. The index's growth hit 1 per cent in April, but subsided afterwards. It was 0.5 per cent in August.

Jonathan Anderson, another UBS economist, said it is too early to talk about a hard landing, although property developers and the auto, steel and semiconductor sectors could all go through some rough times ahead.

"Bubbles are often made by complacent authorities, but the Chinese Government has not been complacent in the past year," he said.

"In fact, it has done much to try to dampen growth in autos, steel, aluminium, cement, glass and everything else."

UBS says constraints on the Chinese Government are very real and can potentially reverse the government's credit tightening at any time to support sufficient economic growth.

"These constraints include the need to create jobs, urbanization, the grand strategy to revitalize the rust-belt provinces, the infrastructure building for the Olympics\World Expo and the 'Go-west' strategy," said Zhang.

China must create about 20 million jobs a year to absorb new entrants into the labour market, let alone to deploy workers from downsized State-owned enterprises and migration from the countryside, he said.

Urbanization is another major issue. Currently, only 36 per cent of Chinese live in cities.

"With the recent gradual lifting of restrictions long imposed on rural residents, we expect the urbanization ratio to continue to rise," Zhang said.

The economist said a 1 percentage point increase in the ratio should translate into 13 million additional urban residents, putting pressure on urban infrastructure, housing, power demand and telecommunications.

"Urbanization means additional demand for jobs, calling for higher economic growth and more accommodating macro policies," Zhang said.

"On the other hand, it puts downward pressure on wages and neutralizes some inflationary pressure (if there is any)."

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