Road ahead could be bumpy

Liang Hongfu

2008-01-15 05:26:38  China Daily      

It is customary at this time of the year for economists and analysts to produce the almost mandatory prognosis of the economy. Their job this year is much more challenging, or interesting, depending on how you look at it, because of dramatic developments the year before, vividly illustrated by the spectacular stock market boom.

Those who subscribe to the belief that what goes up must come down have painted a rather gloomy picture for 2008. Others have remained rather more sanguine, predicting continuous growth, though at a less heady pace.

But all seem to agree that the road ahead can become bumpy if any one of the troubling factors that have been developing in the past several months begins to manifest itself in a way big enough to throw the global economy off balance. We are talking here about the US subprime mortgage woes, the depreciating US dollar, escalating oil prices and heightening concern about the deteriorating environment. These problems are already threatening to hobble the growth of the major economies, including the US and Japan.

The latest warning came from the unexpected rise in the unemployment rate in the US last month, which was taken by many economists as a sign showing that the credit crisis has spread from the housing front to the broader economy. US government figures show that unemployment increased to 5 percent in December from 4.7 percent a month before. Although a 5 percent unemployment rate is not high by historical standards, economists were concerned that the increase could seriously dampen consumers' sentiment and tip the economy into a recession.

The problem is compounded by high oil prices with no respite in sight in the foreseeable future. There is no indication that the oil-producing countries will agree to increase output anytime soon, and the governments of developed countries have so far refrained from releasing their strategic oil reserves to dampen prices.

The shock from rising energy prices could prompt consumers in the US to further cut down on their purchases, which would in turn, depress imports. Some manufacturers in China have already reported a change in overseas buyers' ordering patterns. Buyers are now placing smaller orders than before.

A sharp decline in exports could show up the problems of excess capacity in certain sectors, notably steel and heavy equipment, of the Chinese economy. This would call for a much more drastic readjustment process to regain growth equilibrium.

On the brighter side, inflation, as defined by the consumer price index, is expected by many economists to slow in 2008. Their optimism is based on the fact that inflation in 2007 was largely driven by the sharp rise in the prices of certain foods, mainly pork and eggs because of supply disruptions. As this situation is unlikely to continue in 2008, economists are confident that the inflation rate will slip back to the so-called "acceptable" 3 percent range.

Worries about the possible bursting of the property bubble have subsided because government interventions to moderate property prices are seen to have produced apparent results in the first-tier cities, including Shanghai, Guangzhou and Shenzhen. To be sure, the prices of luxury apartments in the major cities will most probably continue to scale new heights. But that segment of the market has little, or no, consequence to the overall economy.

What does all that mean to the stock market? It should have become clear to even the most inert investor that the A- share market has become fundamentally over-valued and vulnerable to further sharp corrections. But there is sufficient liquidity in the market to ensure that the occasional price adjustments are not going to turn into a rout.