China's recovery won't drive up commodity prices: Morgan Stanley economist

China's developing
economic recovery would not raise overall commodity prices, Morgan Stanley's
chief economist for Greater China said here Wednesday.

Wang Qing told a media roundtable that the prices of
staple goods would remain low as the global economy was still only at the

stage
where policy makers had managed to avoid a situation parallel to the Great
Depression of the 1930s.

Interpreting recent price hikes for gold, non-ferrous
metals, oil and grains as an "adjustment of relative prices," Wang said that

the
genuine driving force for inflation -- price hikes from an overall demand
increase -- was nowhere in sight.

"The rising prices mirror the ongoing global economic
recovery and will not hinder the overall recovery process," Wang said.

As the global economic structure hasn't changed
during the crisis, the rise of emerging markets such as India and China and
their reviving appetite for resources would inevitably push up commodity

prices.
But at the same time, their growing productivity also pushed down the prices

of
industrial products.

Such an adjustment in relative prices reflected the
scarcity of staple goods relative to industrial products. Since distressed
selling had kept a firm lid on prices during the crisis, the commodities

market
needed a reasonable rebound, Wang said.

As a bullish commodity market restrained only the
economies that grew by a small margin before the crisis, Wang said that some
countries would be hurt by rising commodity prices, but that situation

wouldn't
stop a global recovery.

　　INFLATION NO IMMEDIATE CONCERN

In general, he said, inflation would not become a
concern in the next 12 months for the Chinese, U.S. or global economy.

Likening the market argument over inflation or
deflation to the rivalry between Milton Friedman and John Maynard Keynes,

Wang
said that it was understandable for staunch followers of Friedman to think

that
credit and money supply growth would result in inflation sooner or later.

This correlation would break down, however, based on
Keynesian Theory, he said. That theory stated that when an economy was
catastrophically hit by a financial crisis, inflation couldn't surface when
market demand was weak and the output gap was massive, he said.

Citing records dating back to 1997, when the Asian
financial crisis began, Wang said that the Chinese economy, in particular,

had
seen an interesting correlation between price drops and export declines.

The previous two bouts of deflation, after the Asian
crisis and the 2002 dotcom collapse, both followed plunges in exports.

"As the current export and price drops are the worst
ever, it has been difficult for us to imagine the risk of inflation," Wang

said.


　　NO HOUSING BUBBLE

Regarding the housing recovery as the "most inspiring
development" in the Chinese economy, Wang brushed aside concerns of a bubble

and
said he saw the housing market as a significant gauge of the health of the
Chinese economy.

The Chinese economy was past the worst, which was in
the fourth quarter of last year if judged by chain growth or in the first
quarter if judged on a year-on-year basis.

The fastest-paced quarterly recovery would occur in
the first quarter of 2010, Wang said.

As historic data show that the expansion of new floor
area would lag housing sales growth by six months, while loan growth would

lead
fixed-asset investment by six months, Morgan Stanley held that more housing
demand would emerge in China.

To make a sound assessment of China's economy during
the second half of the year and into next year, Wang advised paying more
attention to the supporting role of real estate in the economy.

He said there were clearer signs that the government
had found a "sustainable business model" to address the property problem.

As the government was developing subsidized
low-income apartments together with commercial housing, Wang said jokingly

that
the government had finally learned to "walk with both legs."

A thorny problem facing China's housing industry,
Wang said, was that the market had brought wealth disparities, which were

rare
during the years of the planned economy, out into the open in only a few

years.

"That has had a heavy impact on the general public
and emotionalized almost every academic discussion of housing bubbles," he

said.


As the weakening of the housing market was mainly
caused by the tight monetary policy adopted on Jan. 1, 2008, policy changes
after the crisis had eased the credit environment for realtors and helped end
the "buyers' strike" during which many consumers postponed their home

purchases
until prices fell.

　　KUDOS TO CENTRAL BANKS

Despite warnings from academia to many central banks
about inflationary risks, Wang said central banks, including the U.S. Federal
Reserve Board and the People's Bank of China, should be given credit for

having
raised inflation expectations when actually, the economy faced unprecedented
deflationary pressure.

"Without a sufficiently high inflation expectations,
the global economy could hardly emerge from the shadows of economic

depression.
That proves the validity of central bank policies," he said.

"The past rapid expansion of the Chinese and global
economy was an overdraft on the future. The Great Depression was a way to

make
up for an earlier overdraft, but in a catastrophic way.

"Contemporary policymakers who grew up with Keynesian
Theory and macroeconomics are seeking to contain a catastrophe at the price

of
some inflationary risks. If we didn't need to take any inflationary risk, the
crisis would not be anywhere close to the Great Depression of the 1930s," he
said.

The ideal and most likely outcome in the next five or
six years, according to Morgan Stanley's forecast, would be slower growth but
higher inflation. Specifically, the growth of the global economy would drop

to 1
percent to 3 percent annually, while that of the Chinese economy would slow

to 7
percent to 9 percent annually from rates exceeding 10 percent.

The inflation rates for both China and the world
would rise to 3 percent to 5 percent.