HONG KONG: The acceleration in the mainland's economic growth has raised concerns about potential monetary tightening by Beijing that may trigger a reversal in asset prices. However some economists believe the local asset markets won't be hard hit, if, as they believe, the tightening will come gradually as well as later.

The mainland's GDP grew 8.9 percent in the third quarter from a year ago, the fastest pace in a year, as positive effects of the central government's stimulus package increasingly fed through, the National Statistics Bureau said in Beijing yesterday.

The latest reading was a big jump from the 7.9 percent and 6.1 percent growth rate recorded in the first and second quarters, respectively.

The rapid acceleration in GDP growth, together with some delicate rhetorical changes in the central government's policy statements, has caused some concerns that Beijing will soon tighten its monetary policies to pre-empt any potential price bubbles.

"The policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations," the State Council said in a statement on Wednesday.

Monetary tightening measures such as hikes in interest rates and reserve requirement ratios (RRR) - the portion of deposits that commercial banks are obliged to place in the central bank - will inevitably drain some of the liquidity in the market, putting downward pressure on asset prices.

In that case, the city's asset markets will also likely be hit, as it is widely believed that local asset prices - including those of stocks and properties - have been inflated in part by liquidity that has flowed in from the mainland.

A sharp fall in the Shanghai market will also very likely trigger a slump in the local market due to their high correlation.

However, "Monetary tightening is unlikely to happen near-term," said Liu Xin, an economist at Bank of Communication (Hong Kong).

A great portion of the GDP growth in the second and third quarter was generated by huge fixed-asset investments that were made possible by the central government's monetary easier-money policy that flooded the system with liquidity after the financial crisis, he said.

The country needs to continue to rely on investment as a growth engine, as the contribution from domestic consumption remains relatively weak, while exports have been contributing negatively to the economic growth, the economist noted.

"The conditions that warrant any monetary tightening have yet to appear," he said, predicting that any tightening measure won't come until the second or third quarter next year, adding that the tightening process will come only gradually, which will be unlikely to trigger a slump in the asset markets, the economist suggested.

Kevin Lai, a senior economist at Daiwa Institute Research, also believes that Beijing is unlikely to make drastic tightening moves in the foreseeable future.

"As the market digests news about tightening moves in the future, asset prices will likely correct," he said, but quickly added that even if monetary tightening is implemented, he does not expect another plunge, because the credit squeeze is likely to be gradual.

Meanwhile, Daniel Chan, senior investment strategist at DBS Bank, also believes that the central government won't start tightening until early next year.

He expects Beijing to tighten credit extended to industries that are already plagued by overcapacity. But he doesn't see odds that Beijing will resort to general austerity.

(HK Edition 10/23/2009 page3)