International | Jun 20 2006
In what has become a classic will they won’t they debate, Danske Bank has pitched in with its view on the likelihood of a Chinese economic slowdown. Its opinion couldn’t be much clearer – It ain’t going to happen.
While the People’s Bank of China (PBoC) has introduced a series of high profile measures in its attempt to cool economic growth, such as a 27 basis point increase in its base lending rate and a 0.5% lift in its bank reserve ratio, Danske analyst Thomas Harr says what the PBoC really wants to do is slow fixed asset investment (FAI) growth as the Chinese economy is plagued by over capacity, he argues.
Although the Central Bank is taking steps to slowdown money and credit growth, Harr feels this may have little effect on investment growth as less than 20% of it is financed by domestic bank loans and because it is FAI in local rather than central government projects that is booming, he adds.
Slowing FAI in local projects will be very difficult, Harr says, due to the lack of incentives for provinces to do so and even though he expects the PBoC to take further steps, "they will not enact sufficiently drastic measures."
As such, he expects FAI growth to remain at "very high levels" for the rest of the year, but as the global industrial cycle slows Chinese industrial production and export growth are seen "trending downwards," although private consumption is expected to remain strong.
By Terry Hughes
