China's economy grows into 2010

China’s economy began 2010 at a cracking pace, logging surprisingly strong 11.9 percent year-on-year growth in the first quarter that supports the case for tighter monetary policy to avert the risk of overheating.

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 undeniably robust and would justify a firmer policy stance to nip inflation in the bud.

“We think in the 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 Son and Helen Qiao said in a note to clients.

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 neighbors, including India and Malaysia, China has kept its benchmark interest rates unchanged even though it is leading the global recovery charge.

And unlike Singapore on Wednesday, it has not tightened financial conditions by pushing up its exchange rate — despite intense pressure from Washington, most recently in talks in Washington on Monday between U.S. President Barack Obama and Chinese President Hu Jintao.

However, Glenn Maguire with Societe Generale in Hong Kong said the figures reinforced his conviction that a revaluation of the yuan, and a widening of its trading band, was imminent because subdued inflation did not warrant higher borrowing costs.

“This does not suggest an economy that is overheating. In line with that, it brings the yuan debate back to front and center as likely to be the next policy move,” he said.

INFLATION UNDER CONTROL

Consumer prices rose 2.4 percent in the year to March, below market expectations of a 2.6 percent increase and down from 2.7 percent in February.

Factory gate prices also rose less than expected in the year to March, by 5.9 percent. Economists had tipped a 6.4 percent increase.

The soft inflation reading means the central bank may be reluctant to raise interest rates until June, when the rise in the consumer price index is likely to hit the government’s 3 percent ceiling, said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.

“Growth is running too hot; it requires policy tightening,” he said. “So in short, it’s a dangerous mix of numbers.”

The central bank is mainly tapping on the brakes by enforcing a cut in this year’s quota for new bank lending 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.

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.

But, in a possible sign of its willingness to contemplate tighter policy settings, the cabinet omitted a stock phrase used in its assessments last year that the economic recovery was not yet on a solid footing.

Regardless of the degree of tightening, economists said the first quarter was likely to 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.

Figures for March were also strong.

Retail sales rose 18.0 percent from a year earlier, in line with forecasts; industrial output expanded 18.1 percent, just a touch below expectations; and investment in fixed assets in urban areas such as roads and factories rose 26.4 percent in the first quarter, beating forecasts of a 26.0 percent increase.

“In 2009, China was among the first countries to recover. This year, the economy’s momentum has increased. We are off to a good start,” statistics office spokesman Li Xiaochao told a news conference.

But he added: “The global economy is recovering slowly and it is not yet balanced. Commodity prices are high and there are sovereign debt worries in some countries. So there are many uncertainties.”

Source: Reuters