How economic forecasters see
China in 2007 and 2008  

Sunday, December 17, 2006 10:42:33 PM (GMT-06:00)

Provided by: Reuters News  

BEIJING , Dec 18 (Reuters) - Following are highlights of what forecasters have had to say recently about the outlook for China 's economy and the yuan in 2007 and beyond:

BANK OF AMERICA (Dec. 13)

-- The tension between China 's view of the yuan as a "symbol of sovereignty" and the U.S. view that its limited appreciation is a "symbol of protectionism" will persist for a long time.

-- "The USD/CNY appreciation will continue to be gradual, likely at an annualised pace of 4-6 percent in 2007, which is basically unchanged from the pace we have witnessed in the last months of 2006."

CITIGROUP (Dec. 1)

-- GDP to rise 9.8 percent in 2007 and 10.7 percent in 2008, still led by investment with only gradual firming in consumption.

-- Yuan to reach 7.33 per dollar by end-2007 and 6.89 percent by end-2008. "As major Asian currencies would also gain against the dollar, relatively faster appreciation of the renminbi is unlikely to lead to significant profit squeeze."

-- However, another one-off yuan adjustment might become inevitable if the external surplus becomes unmanageable.

-- CPI inflation to accelerate to 3.0 percent in 2007 and 4.5 percent in 2008, with upside risks for both inflation and market interest rates. Further rises in required reserves are likely.

CLSA (Dec. 13)

-- The risk of a U.S. recession in 2007 would hit China hard.

-- "Export industries are still geared to consumer goods despite broadening of the export base in the last two years. We expect a 7 percent export growth rate in 2007, down from 28 percent in 2006."

-- Capital flows and risk appetite will also be hit. This will tighten monetary conditions at a time when money growth is already falling, exposing cracks in corporate profitability.

"We expect GDP growth in the range of 5-7 percent, higher than our forecast three months ago purely because of arithmetical carry. The implication is still for barely any quarter-on-quarter growth through most of this year (2007). Expect renminbi gains to reverse moderately."

GOLDMAN SACHS (Dec. 4)

-- GDP to rise 9.8 percent in 2007 and 10.0 percent in 2008. "If our forecast materialises, this would have been the longest and least volatile cycle China has enjoyed since 1978."

-- The risks are on the upside because productivity gains mean medium-term trend growth is likely to be close to 10 percent and macro-policy management has improved a lot.

-- Two 27-basis-point interest rate rises are probable in 2007 and another one in 2008. The yuan is likely to rise 5.7 percent against the dollar next year and 5.3 percent in 2008.

    
 JPMORGAN CHASE BANK (Dec. 1)

-- GDP to slow to 9.5 percent, 2007 CPI to rise 2 percent.

-- Required reserves will rise to 11 percent by end-2007,

from 9 percent now, as PBOC continues to "normalise" policy.

-- Macro curbs on land use and bank lending to stay in place.

A much faster rise in the yuan, to 7.00 per dollar by end-2007, is also crucial to rebalance policy and spur private consumption.

-- "In practice, the authorities are likely to move gradually to allow fundamental market forces to guide the CNY exchange rate steadily upward, keeping an eye on the extent of current account adjustment, the economy's near-term growth momentum, and the trend in CPI inflation -- all of which currently point toward the need for faster CNY appreciation -- as near-term yardsticks for determining the pace of CNY moves."

LEHMAN BROTHERS (Dec. 11)

-- GDP to grow 9.6 percent in 2007, CPI to rise 2.0 percent and interest rates to rise 27 bp in the first half.

-- The yuan will reach 7.50 per dollar by end-2007. As well as gradual FX appreciation, Beijing will pull other levers to reduce its trade surplus, including a more-expansionary fiscal policy, further opening of the capital account, dividend and tax reforms and new pricing policies to promote energy efficiency.

-- "The risk is that, if the reforms move too slowly, the imbalances in the Chinese economy could continue to increase rather than decrease."

    MERRILL LYNCH (Dec. 12)
-- "The need for higher (interest) rates will become especially important in 2007 if, as we expect, firms learn to work around the current administrative controls on credit and investment."

-- The yuan needs to rise faster in response to a surging trade surplus and growing political frustration at China 's slow progress to date. Appreciation of 6 percent is likely in 2007.

    OECD (Nov. 28)

    -- GDP to rise 10.3 percent in 2007, 10.7 percent in 2008.

-- Because of strong investment, China now has the capacity to grow at "somewhat more than 10 percent". So consumer inflation should remain tame at around 1 percent in 2007 and 2008.

- "A more rapid appreciation of the exchange rate would not only reduce the risk of overheating, but would help diffuse the protectionist sentiments that have grown abroad."

    STANDARD CHARTERED BANK (Dec. 12)

-- Current account surplus will rise to $282 billion in 2007 and $325 billion in 2008, from $161 billion last year, driven by sustained growth in China 's processing trade.

-- FX reserves on track to hit $2 trillion by end-2009.

-- "We expect more VAT export rebates to be cancelled, quicker action to reduce tax incentives for processing, and also more serious consideration to moderately faster CNY appreciation. But for 2007-08, we believe, it will likely be too late and application of the laws of gravity will be further postponed."

-- Higher food costs will push up CPI inflation to 3.0 percent in 2007, prompting a 27 bp interest rate rise in the first half.

    UBS (Dec. 12)

-- Political constraints make it virtually impossible to allow a sharp rise in the yuan any time soon. Instead, gradual appreciation of 5 percent or so is likely in 2007.

-- China 's seasonally adjusted trade surplus is likely to peak in the first half of 2007 and fall thereafter.

-- Headline 2008 GDP growth likely to be 8.0 to 8.5 percent.

-- "There is no sustainable way to 'rebalance' the Chinese economy at 10.5 percent y/y or 11 percent y/y GDP growth rates. We estimate structural real growth rates at around 9 percent, and this is where the economy must return.

"Rising household spending will not save the economy from an aggregate slowdown, and we expect that investors are more likely to be reading about slowing investment and falling net exports rather than booming urban consumption in 2007 and 2008."

WESTPAC (Dec. 18)

-- Chinese investment is more import-intensive than consumption, so shifting demand towards consumers will keep the trade surplus large.

"Liquidity management will remain a priority and external pressure for a more flexible currency regime will remain high. Recent high-level dialogue with the U.S. reinforces this point.

"We expect CNY/USD to appreciate by some 3 percent in 2007. In a weak U.S. dollar environment, that forecast is more likely to prove conservative rather than aggressive."