China, India and Japan, the three major regional economies, will continue to drive economic development in the Asia Pacific region in 2007. China, in particular, continues to be a key locomotive for regional growth, with the economic slowdown in the U.S. expected to dampen China's growth momentum only marginally.

The 2007 Asia-Pacific Markets Outlook published by Standard & Poor's on Tuesday said Chin's real GDP growth in 2006 is likely to reach 10.5%, after hitting a high of 11.3% in the second quarter.

The report said macroeconomic stabilization measures, tighter fiscal policy, and an over-heated stock market in 2006 would help restrict GDP growth in 2007 to 10%.

"In 2007-2008 the theme of stability will be more crucial than ever in guiding policymaking," said Ping Chew, Managing Director of Corporate and Government Ratings, Asia. "A conservative, gradualist approach will be even more apparent in implementing key policy changes."

"Recently introduced austerity measures to cool down real estate prices may weaken the credit profile of small developers with limited financial flexibility. High raw material costs and increased price competition due to overcapacity will put more pressure on profit margins for downstream companies in China," said Ryan Tsang, Director and Team Leader of Corporate, Infrastructure and Financial Institutions Ratings, Greater China.

The report said the outlook on China's banking industry is positive. Reform efforts by the rated banks are producing tangible benefits. Lending is likely to grow in a more controlled manner in 2007, as the government continues to manage the economy to avoid overheating and over-capacity in certain industries.

"The sector's risk management capability is little tested and remains a key rating factor. A slowdown in economic growth could turn the sector's large portfolio of special mention loans into NPLs (non-performing loans)," said Tsang.

On the equity side, Standard & Poor's remains positive about China although it is "concerned that stock market rises in 2006 of over 80% for A-shares and 50% for H-shares are too exuberant," according to the report.

"Performance could return to normal in 2007," said Lorraine Tan, Vice President of Standard & Poor's Equity Research.

"However, after five years of consolidation, 2006 is the first real year of gains for the A-share market which is largely a domestic-only equity market. Share ownership levels are still historically low and valuations are not exorbitant."

"Our interest in A-shares is mainly due to their significance in the performance of H-shares. A rising A-share market is likely to pull H-share prices higher although the converse is not necessarily true given the lower PERs (price earning ratios) of H-shares. Our preferred route of entry to the Chinese market is still through H-shares," continued Tan.

Source: Xinhua