China's overall economic landscape remains in good shape, but renewed challenges that include potentially slower export growth and inflation pressure loom ahead in the second half of 2010, Yonghao Pu, head of wealth management research at UBS Asia Pacific, told the media Tuesday.

Private consumption since the third quarter 2008 has witnessed a strong rebound in China, with a cumulative increase close to 20 percent. The good news is shared by many other Asian economies such as India and Indonesia, signaling robust economic momentum of the region as a whole, powered by a steady increase of domestic demand.

The first six months this year have seen a downward trend of the loan growth rate in China, which, Patrik Ho said, is a rather healthy sign. Ho is head of equity research at UBS Asia Pacific. "It (the decline) makes sense, because the (comparison) base is too high. This in effect moderates the risk of overheating," Ho said, predicting that the loan growth rate is going to hover around 18 percent in the second half of 2010.

However, two main challenges may cloud China's economic prospects for the upcoming half year, Pu said. One is the fiscal consolidation gaining momentum recently, a move taken by the developed economies including the US and Europe, in the wake of the Greek debt crisis. "The fiscal consolidation possibly will deflate China's export growth in the second half-year," he said. However, "China's economic growth engine will not stop because of receding exports," he added, suggesting that the country's economic growth has been gradually shifting from export-driven to domestic consumption-driven since the financial crisis broke out in 2008. The export sector will feel the impact of this shift, but China's economy still has the dynamism to grow.

The other challenge rests with inflation, according to Pu. The previous six-month period has already seen the CPI exceeding 3 percent - a warning of imminent inflation pressure. "Compared with the challenge of fiscal consolidation, the challenge of inflation is graver," said Pu, who predicts inflation will peak in the upcoming third quarter. However, he also suggested that the pressure of inflation may ease toward the end of 2010 following a possible rise of interest rates and renminbi appreciation.

Finally, Pu noted that renminbi appreciation, made more likely by the recently announced policy of de-pegging the Chinese currency from the US dollar, will not necessarily be a bad thing. For one thing, the yuan's appreciation will boost the purchasing power of domestic consumers. For another, a stronger currency will force the investment focus to move away from export-oriented sector to the service sector as well as to the value-added product manufacturing sector, thus accelerating China's transition to a more consumption-based economic growth model. According to Pu, an appreciation of around 3-5 percent is likely on a 12-month basis.

China Daily

(HK Edition 06/23/2010 page3)