Less war risk estimated for China: Salomon Smith Barney

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Last updated at: (Beijing Time) Friday, March 14, 2003

Less war risk estimated for China: Salomon Smith Barney

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For China, there is perhaps also a less negative aspect of the rising war risk: international investors look increasingly to China as a safe haven as the external world becomes more volatile, said an equity researcher's latest report.

"While the Chinese economy would not be able to escape the negative impact of a war in the Middle East, it would probably continue its rapid growth of the past decade, said Salomon Smith Barney's latest report published by its China researcher Huang Yiping in the Hong Kong Special Administrative Region recently.

The report sets out three scenarios. Under the mild scenario, the researcher said its 2003 forecast for the Chinese economy is based on the assumption that there would be a quick war, which possibly lasts for 4-6 weeks with oil prices hiking to 35 US dollars per barrel but returning to 23 dollars per barrel later.

"Under such a scenario, we expect China's GDP to grow slightly to 7.6 percent this year from 8 percent last year and CPI to pick up to 0.5 percent to -0.8 percent," it said.

In the intermediate scenario with a 30 percent to 40 percent probability as estimated by the researcher, assuming major military resistance, limited damage to oil facilities and limited use of weapons of mass destruction, the war would last for 6 to 12weeks and oil prices would rise to 42 US dollars but decline slowly to 30 dollars per barrel over a three-quarter period, the report said.

In the worst case with a 5 percent to 10 percent probability, assuming protracted resistance, significant casualties, rising Arab hostility to the United States and its allies, and significant damage to oil facilities, the war would last 3-6 months, and oil prices would initially surge drastically to 80 dollars per barrel, but then fall back to 40 dollars per barrel over a period of four quarters, it said.

"In any case, the Chinese economy will probably be able to maintain relatively rapid GDP growth, mostly likely above 6 percent. This supports the popular perception that China is a safe haven. But implications of the war for investment could be much more complicated than that," it remarked.

It estimated that 1 percentage point to GDP growth of China could lead to a loss of 30 percent of industrial profits, the report added.

But if war becomes stickier, China will see more adjustments in export and import growth than in consumption and investment growth in the first year.

"This is consistent with the common belief that, in a volatile global environment, investors should favor domestic demand-related activities over export-oriented sectors," the report said.

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