Looking ahead with a hint of intuition

09:15, January 17, 2011      

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As China's economic growth continues to capture global attention, people tend to ask what a series of economic figures actually means for policy changes and influence on equity markets. Investors usually place their faith in a group of experts: economists. Some people might think economists live in a very different world, and admittedly, the language they use is sometimes hard to penetrate. Shanghai Daily today begins a series in which the "mysterious" people behind the forecasts try to explain their thoughts in a way that can be understood by people who aren't economics-savvy.

For Shen Minggao, chief economist for China at Citigroup, doing forward-looking research is more exciting than retrospective studies because of the intricate variables that make almost anything possible.

Trying to predict the future is a tricky business, especially when the forecasts are aimed at investors who may use the advice in putting their money on the line.

Capabilities tested

"Economists working in financial institutions are directly facing investors, and our capabilities are fairly tested by the market movement. It is fun," said Shen during a lecture at Fudan University last month. Before becoming an economist at Citigroup, Shen was a professor at China's prestigious Peking University.

While many economists rely strictly on analysis tools to forecast macroeconomic trends in China, Shen has what he considers an extra weapon in his arsenal: instinct that is derived from years of experience watching China's economic development unfold.

Intuition, he says, helps untangle the complexities of global and domestic politics, environmental changes, public expectations and other factors that influence how an economy operates.

Last year, Shen successfully predicted Chinese authorities would retreat from their relatively loose policy stance in the third quarter and raise interest rates to sop up excessive market liquidity.

He has also revised his estimate for China's gross domestic product growth to 10 percent from an earlier 9 percent forecast for 2010, based on better-than-expected performance by the world's second-largest economy.

"The most difficult part in my job is to decide how the proportion of these elements, or variables, will work on the nerves of policymakers as well as on the overall economy," Shen said.

Back in 2008, when the Chinese economy was widely believed to be overheating, the subprime mortgage crisis blew up in the United States, creating global turmoil that cooled the Chinese economy. Few analysts had predicted the size and scope of the upheaval.

Analysis tools are helpful, of course. But in China, economists in financial institutions don't usually have immediate access to the kind of detailed economic data necessary to dissect what's going on. Then, too, sometimes the data isn't comprehensive enough to give a wide picture of the economy.

For example, services such as child care and Chinese massage aren't fully reported in the official data, yet both are large sources of consumer spending.

Investors need to be cautious, Shen said.

"Many investors look at results, usually only at several lines in a report, without paying much attention to how the figures are generated," he said." But the process of producing a forecast requires more than mere headline figures."

For some doing research and analysis in China, forecasts may result from pure luck more than any meaningful insight. But that isn't a long-term guarantee of success. Astute economists need to build up their own channels of sources and information, he said.

Aware of uncertainties

When many in the United States are presently suggesting a cautious attitude toward China's economy in the short run and a more optimistic outlook further out, Shen's view is just the reverse.

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