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China’s cautious economy targets may blight petchems demand growth

05 March 2010 07:14  [Source: ICIS news]

By Judith Wang and Pearl Bantillo

SHANGHAI (ICIS news)--Concerns about a possible economic overheating in China - the world's third largest economy - may temper growth in the country's demand for petrochemicals this year, analysts said on Friday.

China is the biggest importer and consumer of petrochemicals in Asia.

The Chinese government had set a very conservative GDP growth target of 8% this year, from an actual 8.7% growth in 2009, with an aim to limit the increase in consumer prices to an average of 3% through curbing excessive lending, based on China Premier Wen Jiabao’s presentation at the third session of the 11th National People’s Congress (NPC).

New loans denominated in Chinese yuan this year should be kept at CNY7,500bn ($1,089bn) against a record CNY9,590bn registered in 2009, Wen said.

Lending cuts would lead lower infrastructure investments and could affect overall consumption of commodities and chemicals in China, said Wang Aochao, an analyst with Singapore brokerage UOB Kay Hian.

“I am not very optimistic for this year’s petrochemicals demand. The government is … not very eager for an aggressive GDP growth,” he added.

The GDP growth being eyed for the year was the same target set in 2009, but through heavy pump-priming that led to rapid loan growth, China managed to beat its own target to log an 8.7% growth.

"This is a crucial year for the country to continue fighting against the global financial crisis while maintaining a steady and comparatively fast economic development and accelerating the transformation of economic growth pattern," said China Premier Wen at the 11th NPC session.

Most analysts, however, expect China to accelerate its economic expansion this year.

“The biggest threat [now] is potential overheating,” said David Cohen, Singapore-based chief economist at research firm Action Economics.

Cohen said he was projecting a 9.5% annual economic growth, with exports – a major engine of growth for China and for most Asian economies – logging in at least a 20% growth.

There were concerns that asset bubbles may form as too much money floating around may be being channelled to speculative activities in the equities and real estate markets, analysts said.

As the global economic recovery remains at a fragile state, China was unlikely to withdraw its fiscal stimulus measures too soon, analysts said.

The government would tolerate a higher budget deficit of CNY1,005bn this year compared to 2009’s CNY950bn – the highest recorded in six years, based on Wen’s presentation.

The country’s central bank – the People’s Bank of China (PBoC) – may not hike interest rates until June, after keeping them steady since December 2008, said Cohen of Action Economics.

Inflationary pressures in China may also be contained if the government would allow the yuan to moderately appreciate, he said.

A stronger yuan would boost China’s purchasing power, but this would also make its exports more expensive.

“They [China] have been resisting calls to allow the yuan to appreciate. It is in their own interest,” said Cohen, but added that the increase in consumer prices, which was at 1.5% in January, does not currently warrant any drastic action from the authorities.

($1 = CNY6.83)

With additional reporting by Nurluqman Suratman



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