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Don't be led astray by foreign investment banks

By Wang Zhongmei (Global Times)

13:25, June 17, 2013

As a growing number of foreign investment banks lower their outlooks for China's economy and several of its industries, local investors should look carefully at the intentions behind these downgrades before blindly using them to direct their own investment moves.

I would like to remind Chinese investors that these banks are for-profit entities that, at their core, are motivated by their own bottom lines rather than the need to protect the public. This fact often gets lost though against the strong reputations many of these institutions have for accuracy and transparency.

Goldman Sachs, for instance, started to invest heavily in China's market at the beginning of the 2000s, plunging capital into everything from mining to banking.

In 2003, this institution predicted that China would have the world's largest economy by 2039.

Six years later, when it brought this prediction forward to 2027, a massive wave of investment funding swept into China's capital market, hoisting the value of Goldman's local investments in the process.

But since the early 2010s, this institution has been scaling back its forecast for China's prospects for growth. Just last week, Ha Jiming, vice chairman of the institution's investment management unit in China, wrote in a report that "China has basically said goodbye to 8 percent GDP growth in spirit if not in statistics and will have to embrace slower growth, with the average annual growth rate in the next seven years to 2020 perhaps falling to the vicinity of 6 percent."

Such remarks came just weeks after Goldman sold off the last of its remaining shares in Industrial and Commercial Bank of China (ICBC).

Excluding exchange rate fluctuations and dividend payouts, Goldman walked away from its stake in ICBC with some $7.26 billion in profits.

Most of the downcast views on China's growth outlook are based on concerns about a protracted slowdown, as well as rising levels of local government debt and non-performing loans (NPLs). Actually, such factors are nothing to be alarmed about.

China is in the midst of restructuring its economy, and it will take some time to establish a new, more sustainable growth pattern. Moreover, local government debts and NPLs are still quite low compared to levels seen in developed nations.

If conditions are indeed taking a turn for the worse, we should have seen a drop in the country's currency price accompanied by major outflows of foreign capital.

Instead we've seen quite the opposite - the yuan's price continues to strengthen against the US dollar while April marked the third straight month of year-on-year expansion in foreign direct investment, according to data from the Ministry of Commerce.

The world's leading financial firms know that investors in China and elsewhere are scrutinizing their every word and their every move.

Before adjusting their own positions in accordance with what they see overseas banks do and say, Chinese investors should consider whether these firms are just trying to use their clout to sway the market for their own self-serving purposes.

The author is an associate research fellow with the World Economy Institute at the Shanghai Academy of Social Sciences.

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