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Christine Chan

Negative fallout expected across the region even if Beijing engineers a soft landing, warns Morgan Stanley

The world will feel the pinch from a slowing mainland economy even if the government is able to engineer a soft landing in the coming year, according to reports by Morgan Stanley.

'As China's industrial growth engine is now throttled down to a distinctly slower speed, the rest of a China-centric Asia can be expected to follow,' warned Stanley Roach, the investment bank's chief global economist.

Mr Roach's remarks came amid pledges by officials, including Premier Wen Jiabao, that the government would move to cool the fast-growing economy.

'Needless to say, this could prove to be a very challenging development for nascent economic recoveries elsewhere in the region,' Mr Roach said in the report.

Global prices of minerals and metals surged 57 per cent in the past two years as the mainland construction industry consumed large volumes of cement, steel and other materials.

Last year,  the mainland accounted for 7 per cent of worldwide crude oil consumption, 25 per cent of aluminium consumption, 27 per cent of steel products, 30 per cent of iron ore, 31 per cent of coal and 40 per cent of cement.

In addition, its main trading partners will also feel the effects of the cooling economy.

Mainland imports grew by 40 per cent last year, fed by a 32 per cent rise in imports from Japan, a 36 per cent rise in imports from South Korea and an astonishing 68 per cent rise in imports from Taiwan.

The US and leading European nations also enjoyed export surges to the mainland, and a slowdown  may also hurt US and European exporters. For instance, 21 per cent of US export growth last year was due to the mainland, along with 28 per cent of German export growth.

'China is still a relatively small economy. But its outsized growth dynamic means that China is now accounting for a disproportionately large share in the growth of aggregate measures of global activity,'  Mr Roach said.

'The global impacts of the coming slowdown in China cannot be taken lightly. When today's Chinese economy sneezes, Asia and possibly even the rest of the world could well catch a cold.

'For a white-hot Chinese economy, the likelihood of dramatic downshifts in industrial activity and investment will have the look and feel of a much more abrupt adjustment than that evident in gross domestic product figures.'

In a recently published report, Morgan Stanley's chief economist for Asia, Andy Xie, warned: 'As China cools its investment bubble, most of the price gain in commodities would be reversed, removing the inflation tax and hence reversing the profit gains of the upstream industries that we have seen in the past two years.'

In Hong Kong, economists were yesterday divided over whether Beijing would raise interest rates  in the near term to cool the economy. Some observers expect it to raise one-year lending rates by 50 basis points  to 5.81 per cent and one-year deposit rates  by 25 basis points  to 2.23 per cent.

But BNP Paribas Peregrine  chief economist Chen Xingdong  said yesterday he did not see an interest rate rise on the mainland  as imminent, as it was an ineffective tool for controlling economic overheating. 'We do not see the possibility of [China] raising rates soon,' he said. 'It is not good timing at this stage to raise rates, and we believe the government has the same understanding.'

Based on the mainland's experience, it  took from six  to nine months for a rate increase to take effect, Mr Chen said.

'Rate changes take longer to impact the economy, and thus are of little immediate help in cooling the overheating,' he said.

'We see a turning point  ahead.  Although overheating  will persist for another few quarters, the  momentum will not accelerate,' he said.

UBS' managing director and head of Asian Pacific Economics, Jonathan Anderson,  wrote in a report issued yesterday that the company was expecting an interest rate rise by the mainland's central bank. He believed Beijing would raise rates to protect household savings.

'The bottom line is that we expect very mild increases in interest rates in the near term,' he said.



China's slowdown  'will affect the global economy'