Tags: AS | China | Economy

China's Economy Surges 12 Percent, May Fuel Tighter Policy

Thursday, 15 April 2010 07:06 AM

China's economic growth surged to 11.9 percent in the first quarter, possibly giving Beijing room to allow its currency to rise, but analysts warned it faces growing pressure to cut back stimulus and keep the world's third-largest economy from overheating.

The strong performance reported Thursday might allow a loosening of politically volatile currency controls by offsetting possible losses in export industries. Analysts expect Beijing to let the yuan rise sometime this year, though President Hu Jintao and others have rejected U.S. and other foreign pressure for a change, saying China will move at its own pace.

Inflation stayed low at 2.2 percent, below the government's target of 3 percent for the year, easing pressure for immediate interest rate hikes or other steps to cool the boom. But analysts said Beijing needs to act soon to head off mounting pressure for prices to rise.

"The tightrope is between pulling away stimulus which is still supporting the economy and tightening quickly enough to keep prices from getting out of control," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates.

Other Asian and European financial markets welcomed the announcement but China's own Shanghai benchmark index edged lower on lingering concerns about a possible rate hike.

After a Cabinet meeting late Wednesday, the government said it wants to keep real estate and other overheated industries in check and was looking into a possible tax on real estate gains to cool surging prices.

"Especially in the cities, housing prices are rising too fast and the rising monetary and fiscal policy risks cannot be ignored," said a government statement.

On Thursday, the Ministry of Land and Resources announced plans to free up more land for residential construction to help ease price pressures, the official Xinhua News Agency reported.

The latest data showed China is on the verge of overtaking Japan as the second-largest economy behind the United States. China's gross domestic product last year was $4.9 trillion, just behind Japan's $5.1 trillion. Tokyo has yet to report first-quarter figures.

China was the second Asian economy to report first quarter growth, following Singapore on Wednesday, which said its gross domestic product expanded by 32.1 percent, its fastest rate in 35 years, adding to signs the region has rebounded from the global downturn.

But while Singapore's central bank responded by announcing its currency will be allowed to strengthen to keep inflation in check, Beijing has yet to make any moves on the yuan.

China has frozen its currency's value against the U.S. dollar since 2008 to help its exporters compete amid weak global demand. Analysts say Beijing needs to allow a stronger yuan to defuse strains in its own economy and boost Chinese consumer buying power but will not act until trade and growth are solid — conditions that Thursday's data suggest are falling into place.

U.S. manufacturers argue the yuan is undervalued by up to 40 percent, giving China's exporters an unfair price advantage and swelling its trade surplus. President Barack Obama has vowed to press for an end to systems that depress the value of currencies but has backed off his confrontational stance in recent weeks, possibly to allow Chinese leaders to act without looking as if they are giving in to foreign pressure.

Despite the strong growth figures, the Chinese government called for caution.

"The current economic situation is still extremely complex and we still face many problems in the process of recovery," the statistics bureau spokesman, Li Xiaochao, told reporters in Beijing. He said the government will maintain pro-stimulus policies but be "more flexible and targeted, according to the situation."

The surge in economic expansion was up from just over 6 percent in the same quarter a year ago and 10.7 percent in the final quarter of 2009. It was supported by a 19.6 percent rise in industrial output over a year earlier and a nearly 26 percent rise in investment in factories and other fixed assets.

Chinese leaders face a challenge in checking inflation and curbing reckless, stimulus-fueled spending on unneeded factories and other assets that could leave a mountain of bad debts.

Beijing raised fuel prices Wednesday in a show of confidence about its ability to keep inflation in check.

Inflation rose to 2.7 percent in February compared with a year earlier, adding to expectations prices may be getting out of hand. The statistics bureau said March inflation eased slightly to 2.4 percent.

On Wednesday, the government reported housing prices in 70 major cities rose 11.7 percent in March from a year earlier — adding to alarm over a potentially dangerous bubble in real estate prices.

"With stimulus already partly removed, the key is whether the authorities can steer the economy onto a more sustainable growth path," said Stephen Green, an economist at Standard Chartered Bank in Shanghai.

Beijing reported its first monthly trade deficit in six years for March as imports surged, reflecting China's faster recovery from the global crisis than its key trading partners.

Lending by Chinese banks fell 43 percent in the first quarter from a year earlier as the government tightened credit controls while trying to wind down its stimulus.

Also helping to cool cool inflation, prices for farm produce have fallen for seven weeks, suggesting food costs would ease.

Regulators have renewed efforts to assess risks from loans and each day brings fresh reports of projects found to be unprofitable or ill-conceived.

A high-speed rail service from Beijing to southeastern China's Fujian province was shut down after just two months because passengers shunned it in favor of cheaper air fares.

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China's economic growth surged to 11.9 percent in the first quarter, possibly giving Beijing room to allow its currency to rise, but analysts warned it faces growing pressure to cut back stimulus and keep the world's third-largest economy from overheating.The strong...
Thursday, 15 April 2010 07:06 AM
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