CICC sounds unusually bearish note on China growth

A major China-based brokerage on Tuesday issued an unusually bearish forecast for the Chinese economy, warning that growth could slip to 7.5 percent next year if the government miscalculates on policy.

But China International Capital Corp (CICC) said the world's fourth-largest economy could grow 9.5 percent in 2009 -- the same as its 2008 forecast -- if officials engineer the right mix of fiscal stimulus this year and monetary easing next year.

The World Bank on Tuesday forecast that China's economy would grow 9.4 percent this year and 9.2 percent next year.

"China's economy is now at a crossroads," CICC economists wrote in a research note. "If policy adjustments are not appropriate, the economy may face high inflation this year but could turn sluggish next year."

Some economists see growth of roughly 7 percent as a threshold below which China cannot slip if it is to absorb the tide of labour flowing from the countryside to cities.

The CICC economists said the downturn would result from a lag effect as slowing exports weigh most heavily on private investment next year.

They also pointed to the Beijing Olympics, the appointment of new government personnel and rebuilding efforts after harsh winter storms two months ago were one-off factors supporting growth this year that would disappear next year.

"China's unemployment rate and banks' bad debt will markedly rise and companies' profits will shrink substantially," they said.

The CICC economists recommended that the government tighten monetary policy appropriately in 2008 before easing its stance and possibly cutting interest rates next year. They added the government should ramp up public spending this year, in part by offering more subsidies to the poorest citizens.

The brokerage forecast inflation would hit 6.5-7 percent this year, which would mark a decade high, before slowing to 3-4 percent next year.