The Chinese economy has fundamentally turned around, but deregulation in the service sector will drive the economy in the medium term, a Credit Suisse economist said Thursday.

"Although China's exports surged 35.9 percent year-on-year in the first seven months of 2000, the growth will moderate to 10 percent to 15 percent in 2001," said Dong Tao, senior regional economist of Credit Suisse First Boston.

Going forward, the recovery momentum will depend very mush on private consumption, which is strapped by urban unemployment and deflation in rural areas, and new drivers are needed to push the economy beyond the 8 percent to 9 percent level, Tao noted.

China's information technology and service sectors are the next growth engines, and should have the power to propel the economy above 10 percent growth, possibly by 2002 or 2003, the economist said.

A rising number of Taiwanese electronics producers relocating to China should improve China's export and industrial mix, Tao said, adding that with 400,000 engineers and scientists graduating each year, China has the advantage of a large quantity of low-cost human capital, an important element for the IT sector.

A recent research report by economists from Credit Suisse showed that corporate restructuring, particularly in the state- owned enterprise sector, and deregulation amid China's accession to the WTO will be another focus for the next five years.

"Mergers and acquisition are coming, but this is a three-year concept instead of six-month, and it is disinflationary," Tao said.

Commenting on the significance of China's service sector, Tao said deregulation will break de facto monopoly in the telecommunications, finance and distribution sectors. "This will create a surge in demand," he stressed.

The economist predicted that the service sector will contribute 50 percent of China's GDP within a decade, compared to 38 percent today.

Tao upgraded his China's 2000 growth forecast he had made in the early February this year, when he predicted the turn-around would come in mid-2001 with growth projected for the whole year at 7 percent.

Looking at the potential of an emerging IT development in China, Tao said an IT boom on the mainland will likely to be full of Chinese characteristics.

"Regulations and policy restrictions have kept most foreign investment from this potentially huge sector so far but we believe liberalization is inevitable as most areas are covered in the WTO accession agreement," Tao said.

(Xinhua)