China's economy roars into 201O

China chalked up unexpectedly strong year-on-year growth in the first quarter of 11.9 percent, prompting renewed calls for tighter policies to prevent the world's third-largest economy from bubbling over. The rate of expansion, the fastest since 2007 and above the median forecast of 11.5 percent in a Reuters poll, was flattered by a low base of comparison a year earlier, when the economy was reeling from the global financial crisis.

But economists said the figures, released on Thursday by the National Bureau of Statistics, were unquestionably sturdy and would justify a firmer policy stance to nip inflation in the bud.

"We think in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating," Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients.

However, not all economists said it was urgent for Beijing to slam on the brakes. They noted that the government is already winding back its anti-crisis investment spending and has ordered banks to reduce new lending by more than 20 percent in 2010.

And while property prices leapt 11.7 percent in the year to March, consumer inflation remains under control. The consumer price index rose 2.4 percent in the year to March, below market expectations of a 2.6 percent increase.

"While we expect policy tightening over the coming quarter, there is no need for dramatic measures," said Mark Williams with Capital Economics in London.


So far this year the central bank has twice raised the proportion of deposits that banks must hold in reserve and has also aggressively drained cash from the banking system.

But unlike a clutch of Asian neighbours, including India and Malaysia, China has kept its benchmark interest rates unchanged even though it is leading the global recovery charge.

"The government is faced with an unpalatable choice: raise rates and dampen the ardour of investors in the real estate sector, or leave rates on hold and allow the property bubble to expand further, and risk inflationary expectations taking hold," said Tom Orlik with Stone & McCarthy Research in Beijing.

And unlike Singapore on Wednesday, China has not tightened financial conditions by pushing up its exchange rate -- despite quiet, persistent pressure from the United States, which believes a cheap yuan gives China an unfair edge in global markets.

The Chinese Commerce Ministry on Thursday reaffirmed its opposition to a stronger yuan, arguing that it would do nothing to solve the problem of near double-digit U.S. unemployment.

However, Glenn Maguire, an economist with Societe Generale in Hong Kong, said Thursday's data deluge reinforced his conviction that a revaluation of the yuan, and a widening of the currency's trading band, were imminent.

"It could happen any time," Maguire said.

"Yuan stability and China's stimulus package made an enormous contribution to global stability in the aftermath of the crisis, but now that China's economy is growing by 12 percent, it's time for China to share some of that growth with the rest of the world via appreciating its exchange rate," he said.

The reaction in financial markets to the figures was muted, partly because they were circulating beforehand.

The yuan rose modestly in the offshore forwards market, which was pricing in a 3.2 percent rise against the dollar over the next year.

Instead of acting through interest rates or the exchange rate, the central bank has relied so far on curbing credit growth to keep the economy on an even keel.

This year's quota for new bank lending has been cut to 7.5 trillion yuan from a record 9.6 trillion yuan in 2009 when banks lent freely at the government's behest to support a 4 trillion yuan fiscal stimulus package.

Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, called Thursday's data "a dangerous mix" because the low inflation reading would delay a rise in borrowing costs.

"Growth is running too hot. It requires policy tightening."


The State Council, China's cabinet, promised on Wednesday after reviewing the incoming data to stick to the "appropriately loose" monetary stance and active fiscal policy first adopted at the height of the global financial crisis in late 2008.

Regardless of the degree of tightening, the first quarter could well prove to be the high watermark for growth this year, as the base of comparison will become increasingly demanding.

A Reuters poll issued on Wednesday projected 10 percent GDP growth this year, which will almost certainly catapult China past Japan and make it the biggest economy in the world after the United States.

In addition to quarterly GDP, China released a batch of figures for March that were strong and close to expectations.

Retail sales rose 18.0 percent from a year earlier, industrial output expanded 18.1 percent, and urban investment in fixed assets such as roads and factories rose 26.4 percent in the first quarter.

"This year, the economy's momentum has increased. We are off to a good start," statistics office spokesman Li Xiaochao said.

(Additional reporting by Aileen Wang, Michael Wei, Langi Chiang and Melanie Lee; Writing by Alan Wheatley; Editing by Ken Wills)

Source: http://in.reuters.com/article/marketsNewsUS/idINTOE63D09120100415

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Last updated 18/04/2010

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