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INTERVIEW-UPDATE 1-JPMorgan warns against yuan mismanagement

Published 12/08/2008, 03:56 AM
Updated 12/08/2008, 04:00 AM

(Adds comments on economy, share market)

By Lu Jianxin and Helen Ding

SHANGHAI, Dec 8 (Reuters) - The chief China economist of JPMorgan Chase warned on Monday that any mismanagement of the yuan exchange rate, towards excessive weakness of the currency, could hurt Chinese financial markets and the economy.

Frank Gong also lowered his forecasts for the growth of China's economy in the fourth quarter of this year and next year, while expecting the government to take further steps to boost the real estate and equity markets.

The yuan slipped to a five-month low against the dollar last week, hitting the bottom of its daily trading band for the first time, as the currency market speculated that China might engineer moderate depreciation of the yuan to stimulate its slowing export sector.

But Gong said in an interview that he did not expect extended weakness of the yuan, and that Chinese authorities would be wrong to push it down significantly.

Gong predicted that in the next three months the yuan, which was at 6.8813 to the dollar early on Monday afternoon, would stay in a range of between 6.8 and 7.0. Between three and 12 months from now, it would appreciate around 3 percent, he predicted.

Depreciation of the yuan could trigger competitive depreciation of other Asian currencies, which would not help Chinese exporters, he told Reuters.

"Mismanagement of the renminbi could cause huge capital outflows and destabilise the A-share market and property market at a time when confidence is low," he said.

"Chinese exporters are still outperforming. China should not resort to devaluation and it would be a wrong policy."

GROWTH FORECASTS

But Gong said China's economy now risked a serious slowdown, and growth might not bottom out until the second quarter of 2009.

"Our view is near-term risks will be on the downside. We have very low expectations for fourth-quarter growth. Basically, we are looking for no growth on a quarter-to-quarter basis for the fourth quarter," he said.

Gong cut his forecast for annual growth of China's gross domestic product in the current quarter to 7.7 percent, from 8.2 percent predicted one month ago.

He reduced his forecast for GDP growth in all of 2008 to 9.2 percent from 9.4 percent, and his prediction for next year's growth to 8.0 percent from 8.1 percent.

Gong expects growth to hit a low of 6.8 percent in the second quarter of 2009 before recovering to 7.7 percent in the third quarter and 9.9 percent in the fourth.

The bounce-back in late 2009 would mainly be propelled by a 4 trillion yuan ($580 billion) economic stimulus plan announced by the government last month.

"And that may not be the end of the story. They are likely to do more, especially on the consumption front," such as taking steps to stimulate the property and equity markets, Gong said.

Over the next three months, authorities are likely to introduce measures such as tax rebates for home buyers, lower downpayments required for the purchase of second homes, and easier financing for property developers, he said.

The government may also keep open the option of possibly setting up a fund to help stabilise the stock market, Gong added. "We have been supporting this idea for a long time."

The benchmark Shanghai Composite Index <.SSEC>, which closed at a two-month high of 2,090 points on Monday, should find firm support at 1,700 points in coming months at least, having factored in the bulk of negative economic news, Gong said.

"The market should have already bottomed out. However, we are not ruling out the possibility for the index to test a new low again in the first quarter of next year" because of negative news on corporate earnings.

"Overall, recovery of the market will be very slow." (Editing by Andrew Torchia)

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