Financial crisis may not bottom out by 2009

Financial crisis may not bottom out by 2009 is CICC (China International Capital Corporation) chief economist 哈继铭 analysis on the current economic movements.

At The 2nd Stage of the Economic Storm
哈继铭 view is that the current economic crisis needs to go through 3 phases. First is the US sub-prime crisis and the real-estate market slump. Next will be followed by the credit crisis which has the characteristic of liquidity almost in a frozen state. The last will be the economic crisis which traditionally companies earnings drop and worst post losses, retrenchment and then the problems with car loans, credit cards and other personal loans.

哈继铭 says that the current global economic crisis is in the 2nd stage. When will it end will still need further observations. He stresses that the recession in the west this time is different from that in the past, its '3 mountainous load' pressing down - real estate, investments and consumption all have problems at the same time. The unemployment rate in US in 2003 reached the climax of 6.3% 2 years after the IT bubble burst. But the current slowdown has just began and the unemployment rate has went above 6.5% with the possibility of going above 8% in the future. This all proves that next year will still be a difficult year.

哈继铭 thinks that the current drop in demand in Europe and US is not as serious as all of us feel. But why does the export related industries in China showing such a huge slowdown? 哈继铭 says that it is because the banks of the west are holding on tightly to their money and not lending out which increases the phenomenon of consumption slowdown. As such, the export related industries in China will face more troubles in future.

To see whether the US economy has bottomed out, 哈继铭 says the most critical benchmark is whether the US housing prices have stopped falling. He says that according to the US housing price to income ratio and the housing price to rental rates ratio from historical data trends, the US housing market will have a 15% drop possibility in the future. Europe's housing market bubble is bigger than US and the bubble has just began to deflate. So the the time cycle of the crisis this time will not be too short.

China's GDP May Have a Soft Landing
China's export, investments and consumption, the 3 economy supporting factors, are currently under test. 哈继铭 thinks that China's export has never de-coupled from US economy. In the future, China's export to the emerging markets will follow the footsteps of the US market.

哈继铭 says that the key is to change from an export led to a domestic demand led model. The China government recently announced 10 policies to stimulate the economy is necessary. Now the important thing is to act fast and 'heavy'. 哈继铭 estimates that the 4 trillion yuan investment can pull up the GDP by 1.8% each year.The new tax policies can pull up the GDP by 2 percentage points. From the looks of things, next year and the year after, there is confidence in keeping the China economy growing at around 8%.

The China stock prices, housing prices and commodities prices have turned bearish in a very short time. Why so? 哈继铭 thinks that this is the result of the world economy switching from an unbalanced to a balanced situation. In the past, oil export countries and manufacturing based emerging countries send their big revenues to the west and the west financial institutions used the money to buy more oil and resources and also invest in the markets of the emerging countries. The west currently needs funding in order to work through the financial crisis and the emerging countries closed up their liquidity tap with some countries affected and ended up in budget deficits. These are what caused the quick reversal in the flow of liquidity and caused the quick change from bull to bear market.

哈继铭 thinks that Europe and US, which are the 2 biggest buyers of 'Made in China' products entering recession and with real estate, investments and consumption all having problems at the same time, needs time to recover. In addition, the bubble bursting of the real estate market in China which was once a big economic pillar for China, the effect of the China government's fixed asset investment plan to stimulate the economy will be decreased. As such, next year's China GDP can expect a soft landing. But export, foreign investments and commodities prices may face a hard landing.

When Will the Demographic Advantage Be Used Up
Can China continue with the high growth like the recent 30 years? 哈继铭 thinks that the point is when will the demographic advantage be used up. When the labor force is young and abundant, it will bring along a big amount of cheap labor and high savings, this is when the economy will have a strong and high economic growth. 哈继铭 estimates that the China labor supply will reach its peak in 2010 and will last for 5 years and starts to go down after 2015. At the same time, Vietnam's demographic advantage turning point will be around 2025. For India, it will be around 2040. Thus, China's economy in the future will be at pressure from those 2 locations. 哈继铭 says that it is very urgent to do 2 transformations. 1) A switch from export led to a domestic led demand model. 2) Industrial structure upgrade.