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China and Hong Kong Remain Resilient in the Face of Inflation Challenges


Credit Suisse has raised the GDP growth forecast for non-Japan Asia to 7.9% from 7.7% for 2008, largely due to an upward revision in China. In its recently released Emerging Markets Economics Quarterly report, Credit Suisse economists warned about the rise of inflation across the emerging markets world, largely driven by mounting food prices.

In China, Dong Tao, Credit Suisse Chief Economist for non Japan Asia, argues that economic growth has been better than the market may have expected, and that GDP growth momentum will be sustained in spite of the credit crisis, high oil prices and the recent natural disaster. Credit Suisse has revised its 2008 GDP growth forecast up from 9.7% to 10.1%, reflecting better net trade. Tao also believes food price inflation should decline on a yearly basis over the next two quarters, thanks to a rising statistical base and better supply, but remains cautious on the inflation outlook for next year. With headline inflation softening, growth risk moderating, Tao expects a period of relatively tolerant economic policies in China - he called it the Olympics honeymoon.

Although the impact of rising oil prices on the Chinese economy remains relatively small, Tao notes that the risk to growth posed by energy costs is increasing. China fixes domestic gasoline and diesel prices at around 40% below the international benchmark, which has protected consumers but caused losses for refineries, even in spite of the subsidies and tax rebates offered on an ad hoc basis.

In Hong Kong, Tao expects that crude oil prices will exert greater pressure on inflation, leading Credit Suisse to revise its 2008 CPI forecast upwards from 4.9% to 5.7%. With the lowest unemployment rate in 10 years, soaring nominal wages are also fuelling inflation. However, Credit Suisse has also increased its 2008 GDP growth forecast for Hong Kong from 3.9% to 4.4% because of stronger than expected trade and consumption momentum.

In India, Credit Suisse’s economists expect that crude oil prices will drive higher inflation and slow down GDP growth. Oil at current or higher prices will also widen trade deficits and create a heavier fiscal burden for the government, they argue. In the context of current price pressures, Credit Suisse has revised its average FY2008/09 WPI inflation forecast upwards, from 4.4% to 7.2% yoy. Credit Suisse economists also expect the Reserve Bank of India to continue its monetary tightening, amid rising inflation pressure, creating a negative impact on credit growth and consumption demand.


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