UBS, Citigroup Cut China Growth Estimates on Europe

UBS AG and Citigroup Inc. cut China growth forecasts for 2012 as home sales slide and Europe, the nation’s biggest export market, faces the risk of a recession.

Gross domestic product will increase 8 percent in 2012, less than a previous call of 8.3 percent, Hong Kong-based economist Wang Tao said in a note today. Citigroup cut its forecast to 8.4 percent from 8.7 percent. The banks have also reduced global growth estimates.

Europe’s debt crisis is sapping export demand just as Premier Wen Jiabao’s crackdown on property speculation damps construction. Goldman Sachs Group Inc. said clients should exit a bet that Hong Kong-listed China companies will gain because “the balance of risks is no longer attractive.”

“Much weaker euro zone growth will affect the rest of the world, including China,” UBS economist Wang said in today’s report. “We think more obvious and persistent easing will likely occur in the first quarter of 2012, when export, construction and industrial production should have decelerated significantly.”

China’s economy, the world’s second biggest, grew 9.1 percent in the third quarter from a year earlier. Expansion has slowed from 11.9 percent in the first quarter of last year.

The benchmark Shanghai Composite Index rose 0.6 percent as of 1:25 p.m. local time, paring this year’s decline to about 15 percent.

Hong Kong Shares

The Hang Seng China Enterprises Index, a gauge of 40 mainland companies listed in Hong Kong, dropped 10 percent from Nov. 5 through yesterday on concern growth will slow because of property curbs and Europe’s debt crisis. In a Nov. 6 report, Goldman Sachs’ analysts had suggested favoring shares in the index because of their underperformance relative to the Standard & Poor’s 500 Index.

Morgan Stanley yesterday lowered its China growth estimate for next year to 8.4 percent from 8.7 percent. The nation is unlikely to be immune from weaker external demand although domestic demand will “hold up well,” Hong Kong-based economists led by Helen Qiao and Yuande Zhu said in a note.

Morgan Stanley cut its forecast for Hong Kong’s growth this year to 4.7 percent from 5 percent, economists led by Denise Yam said in a report dated yesterday. Morgan Stanley predicts the city’s economy will grow 2 percent next year, down from a previous estimate of 4 percent.

Debt Crisis

UBS predicts the world economy will expand 2.7 percent next year, down from a previous estimate of 3.1 percent. Citigroup’s cut to 2.5 percent from 2.8 percent, was the sixth consecutive monthly downgrade, economists led by Willem Buiter and Michael Saunders said in a report dated yesterday.

The Organization for Economic Cooperation and Development says that growing doubts about the survival of Europe’s monetary union has caused global growth to stall and represents the main risk to the world economy.

The Paris-based organization has lowered its estimate for China’s 2012 expansion to 8.5 percent from a 9.2 percent forecast in May. A slowdown in property sales could trigger developer collapses and lead to bad loans, it said.

Poly Real Estate Group Co., China’s second-largest developer by market value, said its contracted sales fell 39 percent in October from a year earlier. Barclays Capital estimates home prices may decrease by 10 percent to 30 percent in the next year.

Sliding Prices

Home prices fell in 33 of 70 cities in October, government data shows. Housing transactions declined 25 percent from September

“We think a sharper deceleration in property investment is the biggest risk to China’s economy,” Johanna Chua, Hong Kong-based chief economist for Asia at Citigroup, said in today’s report. “But a hard landing can be averted in the near term with sufficient policy flexibility to provide offsetting support for growth, especially on the fiscal front.”

UBS’ Wang said the government may relax fiscal policy and bank lending quotas next year.

She estimates additional fiscal spending of about 1 percent of gross domestic product over a 12-month period and that the central bank will raise its new lending target for 2012 to 8 trillion yuan ($1.25 trillion) from 7.3 trillion to 7.4 trillion this year.

Citigroup said the central bank may cut banks’ reserve requirements before the Chinese New Year in late January if recent capital outflows continue and raise interest rates to stabilize deposits.

(Corrects 10th paragraph to show cut was from 2.8 percent.)