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HKMEx: US Economy To Recover Before Europe, Predicts Scholar - Growth Potential Remains In China, But Restrained By Structural Policy

Date 13/12/2011

The US, driven by strong market forces and rapid economic restructuring, is expected to recover from economic downturn before Europe. This is because fiscal and currency restructuring will take longer to implement in Europe, according to renowned Chinese scholar Xu Xiaonian, who was speaking at a seminar jointly hosted by Hong Kong Mercantile Exchange (HKMEx) and Chinese Securities Association of Hong Kong (HKCSA) in Hong Kong yesterday.

Speaking on the topic “The Re-balancing of the Global Economy”, Mr Xu, a professor at the China Europe International Business School, said: “Globalization has created serious imbalances in the world economy. The US over-borrows and over-spends, while the Chinese are excessively saving and investing.”

Xu said that, to aid economic restructuring and recovery, the US has implemented a policy of economic deleveraging through tightened bank credit, stricter regulation of financial institutions, and by changing consumption habits. However, these macroeconomic policies appear to be ineffective. “Low interest rates have helped the de-leveraging process, but they cannot go any lower. Qualitative easing has increased the money supply, but this has failed to transform into loans. The US’s fiscal policy is simply not sustainable given the government’s debt levels. What we are looking at is not a second economic downturn, but the continuation of the same cycle.”

And while the Chinese government has stepped up domestic investment to compensate for decreasing external demand, Xu warned: “This may create additional imbalances, including excessive investment and capacity, under-spending, and the expansion of state-owned enterprises at the expense of private firms.”

On the economic outlook for China in 2012, Xu forecasted external demand to remain weak, with little room for macroeconomic restructuring. Although inflation hit its peak earlier this year, tightened monetary policy introduced since the second half of 2010 is expected to stay, despite a recent slight easing in credit policy.

He predicted that Chinese economy will continue to grow next year, albeit at a slower pace. As an example, Xu noted China’s urbanisation is only 46%, far less than between 70% and 80% in both Japan and Korea. He also said that privatisation of the country’s enterprises is also expected to remain low. Even moderate growth in the service sector will create considerable employment, but overall China’s potential economic growth will be restrained by its policy.

Xu said that the Chinese government is expected to introduce a number of reforms, starting from 2013, in tax, land use, the re-financing of non-performing bank loans, and the deregulation of monopolized industries – particularly in the service sector.

Also speaking at yesterday’s seminar, HKMEx Chairman Barry Cheung said, “Amid the new global economic order and continued rapid economic growth, China has surpassed Japan to be the second largest economy. It has also become one of the largest commodity producers and consumers in the world. Yet global commodity prices continue to be set in commodity exchanges outside China, and futures contracts are still not designed for Asian market participants.

“For China to have stronger price-setting power in the global commodity market, it needs a world-class commodity trading platform within its time zone and territory,” He added.

Mr Cheung said that HKMEx, which benefits from Hong Kong’s competitive advantages, provides market participants in China and around the world with a seamless, state-of-the-art, and transparent electronic platform to trade commodity futures contracts for risk management and investment purposes. Going forward, HKMEx will launch a host of renminbi-denominated futures contracts to meet demand.

Yesterday’s joint HKMEx-CSA was presided over by Leung Chun-ying, former Convener of The Executive Council of Hong Kong, as well as Yan Feng, the Chairman of HKCSA. The event was attended by over 130 representatives from HKCSA and Hong Kong’s financial services industry.