China Growth Forecast Cut to 5.5% at Morgan Stanley

Morgan Stanley cut its economic growth forecast for China in 2009 to 5.5 percent, which would be the weakest pace in almost two decades.

The reduction was from a 7.5 percent estimate, chief China economist Wang Qing wrote in an e-mailed note yesterday.

"We expect the economy to get much worse before getting better," Wangsaid. "This could be a shock to market participants and will likely heighten the uncertainty about China's growth potential over the long run."

China's economy may have contracted in the fourth quarter from the previous quarter as companies ran down inventory and disruptions to trade finance hindered exports, Wang said. A Bloomberg News survey of economists estimates a 6.8 percent expansion from a year earlier, the weakest in seven years. Thefigure is due this week.

China's exports fell in November and December as recessions cut demand in the U.S., Europe and Japan. That compared with growth of more than 20 percent in the same months in 2007.

The shock of the "hard landing" last quarter will weigh on the confidence of investors and households, the economist said. This quarter's growth may tumble to as little as 3 percent to 4 percent, according to Wang.

China has already cut interest rates five times from September and is rolling out a 4 trillion yuan ($585 billion) stimulus package, including spending on railways, roads, airports, public housing and the power grid.

"A sustainable recovery will hinge on the kick-in of the policy stimulus effect in China by mid-year and a tepid recovery of the G3 economies by the fourth quarter," Wang said. The G3 are the U.S., Japan and Europe.

A rebound in growth in the second half may only partly compensate for a shortfall in the first, leaving 2010 as "the real test" for China's economy, the economist said.

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