Tags: AS | China | Economy

China's Economy Surges 10.7 Percent, Setting Stage for Policy Tightening

Thursday, 21 January 2010 07:11 AM

China shook off the global crisis as growth surged to 10.7 percent in the final quarter of 2009 but inflation picked up, adding to pressure on Beijing to cool rising prices without disrupting the recovery.

Quarterly growth beat forecasts and boosted the 2009 expansion in the world's third-largest economy to 8.7 percent, up from a low of 6.1 percent in the first quarter.

A government spokesman declared China the first economy to recover from global slump and indicated it is shifting focus to cooling inflation that rose sharply in the fourth quarter, fueled by massive bank lending in support of a 4 trillion yuan ($586 billion) stimulus program.

"We need to prevent overly fast price increases," said Ma Jiantong, commissioner of the National Bureau of Statistics, at a news conference.

Strong Chinese growth could help to drive a global recovery by boosting demand for foreign oil, consumer goods and other imports. It also might give Beijing confidence to ease currency controls and allow its yuan to rise against the dollar, which could boost imports by making them cheaper for its consumers. China has kept the yuan steady against the dollar since late 2008 to keep its exporters competitive abroad.

But that progress could be derailed if a burst of inflation saps the spending power of Chinese families and forces the government to clamp down so severely on credit and investment that it slows the creation of new jobs.

"The message for the government is, the recovery is on track, the stimulus succeeded, but with the emergence of price pressures, the time to start reining in the stimulus is now," said Tom Orlik, an economist in Beijing for Stone & McCarthy Research Associates.

Inflation is politically sensitive in China, where rising prices can erode economic gains that underpin the ruling Communist Party's claim to power.

Chinese leaders have tried since late 2009 to rein in lending gradually without hurting public confidence. Banks were ordered late last year to slow loan growth and were told last week to set aside more reserves to prevent a surge in credit growth. A record 9.5 trillion yuan ($1.39 trillion) in new loans was extended last year.

Economists expect an interest rate hike in the second half to cool inflation and prevent bubbles in real estate and stock prices, which are up sharply. China's main stock index rose 80 percent last year as stimulus money flowing through the economy helped to finance speculation.

"The price of assets is probably growing too fast," said Ma, the statistics official.

Consumer prices rose in November by 0.6 percent from a year earlier after falling for most of 2009 and the rate jumped to 1.9 percent in December. Citigroup said that was the sharpest one-month rise since February 2008, a period of record inflation.

Ma said most of December's inflation was caused by a 5.3 percent rise in food costs from a year earlier, a change that especially hits China's poor majority.

Beijing reported earlier this month that plunging trade rebounded in December, with exports rising for the first time in 14 months. Consumer spending also is growing, driven by a 45 percent surge in 2009 auto sales.

China's total 2009 gross domestic output was 33.5 trillion yuan ($4.9 trillion), bringing it closer to overtaking Japan as the second-largest economy after the United States. Japan is due to report its own 2009 growth on Feb. 15.

Still, Ma stressed that China sees itself as a poor country. He said average income for city dwellers in 2009 was 18,858 yuan ($2,700) per person, while in the populous countryside it was just 5,153 yuan ($752).

"Despite the increase in our GDP and economic strength, we still have to recognize that China is a developing country," he said. "We have to be keenly aware of that."

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China shook off the global crisis as growth surged to 10.7 percent in the final quarter of 2009 but inflation picked up, adding to pressure on Beijing to cool rising prices without disrupting the recovery.Quarterly growth beat forecasts and boosted the 2009 expansion in the...
Thursday, 21 January 2010 07:11 AM
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