BT : China to prick bubble, land softly: Barclays

Business Times - 26 Jun 2010

China to prick bubble, land softly: Barclays

By JAMIE LEE

CHINA'S economy is likely to experience a soft landing even as the government works to shrink a property bubble, according to a Barclays Capital report.

This will be despite housing prices making an expected decline of 20-30 per cent over the next few quarters, Barclays said.

'In countries with different characteristics, a correction of that magnitude could clearly risk a hard landing, but China may be exceptional.'

The impact of Chinese consumption from the price declines may be smaller than expected, since about half of the Chinese population are based in rural areas where there is no active property trading.

'Low-income and migrant workers would benefit from housing price declines, as they are likely to be home buyers,' added Barclays in its quarterly report.

Although asset bubbles are usually linked to current account deficits - which make economies fragile when the flow of international capital stops - China would not be affected, since it has been heavily investing its capital abroad. A country's level of current account indicates trends in its foreign trade.

'Arguably, the most important difference . . . lies in the banks, which are unlikely to be forced on the defensive and limit lending since, being state-owned, credit decisions will be determined by top-down political directives,' said Barclays, adding that the greater risk from the asset bubble deflation is an implementation one.

Chinese wage increases are unlikely to create significant inflationary pressures in the short term, since these are limited to a few coastal areas and profit margins could absorb some of the wage rises, Barclays noted.

'The change in labour market dynamics is a long-run, secular process that should play out over the years, not months.'

Barclays expects China's gross domestic product to grow 10.1 per cent this year, and ease to 9 per cent in 2011.

GDP growth in Asia is expected to slow to 7.6 per cent in 2011 from 8.8 per cent this year, partly as the impact from fiscal stimulus begins to wane, said Peter Redward, head of emerging Asia research at Barclays.

As for Singapore, growth is expected to be supported by the strength of the cyclical upturn in the global electronics industry, said economist Leong Wai Ho.

It is unlikely to be affected by the debt problems in Europe, as exports to countries in South Europe make up just about one per cent of total exports, he added.

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