2012 trade deficit is likely: economists

BEIJING / SHANGHAI - China is likely to face a trade deficit in 2012, partly driven by the deteriorating eurozone crisis and a possible debt default by Greece, economists warned on Monday.

Stephane Deo, managing director of European Economic Research with UBS AG, said China's 2011 exports to the European Union (EU) registered the worst performance among the country's main trading partners. The high likelihood of a default by debt-ridden Greece, which some analysts predict will happen in March, will further drag down the trade volume, making the first quarter the toughest for Chinese exports.

Deo said that no agreement has been reached for a reduction of Greek debt.

Athens is pinning its hopes on a new 130 billion euro ($165 billion) bailout package from its European partners and the International Monetary Fund (IMF), without which it may easily slide into a debt default.

But the state of current negotiations means that the chances of a bailout package are slim, resulting in high stakes not just for Greece but also the entire eurozone, Deo said.

A UBS report estimated that any country leaving the eurozone would incur a cost of between 9,500 and 11,500 euros per person during the first year following departure, equating to between 40 and 50 percent of GDP.

"If the panic spreads to problematic Italy and Spain, the cost of insuring their debt against default would soar to record levels, and the consequent depression would result in plummeting demand," said Deo.

Any default would have a limited direct effect on Chinese exports, given the marginal share Greece occupies in the European economy.

However, "if it spreads to other EU members such as Italy and Portugal, China's exports would be greatly affected", said Wang Haifeng, director of the International Cooperation Center affiliated to the National Development and Reform Commission.

Wang said that the contribution net exports make to China's GDP growth will shrink substantially in coming years and the economy will largely be fueled by "domestic demand driven by investments in agriculture, education, healthcare and social pensions".

Economists have also predicted that China's GDP will rise by around 8 percent this year, because of the negative contribution from net exports and a cooling of the real estate market, but large-scale construction of affordable housing will be a major driver of economic growth.

Ma Jun, chief economist at Deutsche Bank Greater China, said GDP growth will slow to 8.3 percent this year, lower than the 9.1 percent the bank has predicted for 2011.

"Because of weakening property investment and a slowdown in exports, the first quarter of 2012 will see a deceleration in growth," Ma said. "We predict quarter-on-quarter GDP growth for the fourth quarter will be 7.3 percent, and in the first quarter of 2012 it will hit 6.4 percent."

Sales of residential properties will ebb by between 10 and 15 percent this year and newly started construction units will also slow, said Wang Tao, chief economist at UBS China.

But the unprecedented push for affordable housing will result in a 40 percent rise in total construction, boosting spending on infrastructure, such as materials and machinery.

On the monetary front, Wang said the tightening of credit in China was at its height in the third quarter of last year. Total new loans are expected to reach 8 trillion yuan ($1.27 trillion) this year.

Ma noted that the consumer price index (CPI), a major gauge of inflation, is expected to drop sharply until the third quarter of 2012, and will average 2.8 percent for the whole year.

As a result, "policies such as monetary easing, increased bond issuance by various governments, and possible incentives to support demand from first-home buyers can be expected", Ma said.

The value of the yuan will appreciate by between 3 and 4 percent against the US dollar in 2012, Wang said.