Dented China credibility may hit economy -JPMorgan

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BEIJING, Nov 6 (Reuters) China's economy could suffer in the event of more policy lurches that dent the government's credibility, JPMorgan economist Frank Gong said on Tuesday.

Beijing last week ordered a rise in fuel prices, a week after Premier Wen Jiabao confirmed a freeze on government-set prices until next year. At the weekend, Wen put on hold a landmark plan to let Chinese invest directly in Hong Kong shares, triggering on Monday the largest-ever points fall in the local market.

''If we keep seeing huge swings in terms of important policies, and the government itself cannot make up its mind on important policies, then of course you create risks to the economy,'' Gong, who is also head of research and strategy at JP Morgan Securities in Hong Kong, told reporters.

''If you don't have credibility in a mostly market-based economy, it's not just the market losing confidence, the whole operation of the economy will be at stake and the implementation of policies will be at stake,'' he added.

Gong, who has long held an above-consensus forecast for the yuan, said he expected Beijing to gradually let the currency rise faster. But he said another one-off revaluation, after the 2.1 percent adustment in July 2005, was unlikely, not least because Wen had publicly ruled it out.

''If he somehow eats his words again, it would be a big issue.

Especially on the currency front, you want to stick to your words,'' Gong said.

He said the danger was that Beijing would hold down the yuan for too long. ''The risk is how fast will be enough to prevent China from becoming another Japan.'' As in Japan 20 years ago, excess liquidity is inflating share prices to levels that are hard to justify, exemplified by the stratospheric value placed on PetroChina <601857.SS> when its shares started trading in Shanghai on Monday, Gong said.

The eventual bursting of Japan's bubble ushered in a decade of economic stagnation, Gong noted, adding: ''China can get there very fast if they do not put up a serious effort to address the excess liquidity problem.'' REUTERS BJR DS1402

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