Wandering China

An East/West pulse of China's fourth rise from down under.

China growth signals looming rate rise [The Age/Reuters]


China growth signals looming rate rise
Reuters
Source – The Age, published January 20, 2011 – 1:06PM

China finished 2010 with a bang, its growth soaring past expectations while inflation slowed less than expected, numbers that could prod the government to ratchet up its easy-does-it approach to policy tightening.

Food costs, the main driver of Chinese inflation, have picked up in recent weeks, showing that Beijing has its work cut out to keep a lid on price pressures.

But other important December data, from factory output to investment, painted a picture of stable expansion, suggesting the world’s second-largest economy was free from overheating, despite the surprise jump in growth.

China’s annual gross domestic product growth sped up in the fourth quarter to 9.8 per cent from 9.6 per cent in the third quarter, the National Bureau of Statistics said today, defying expectations for a slowdown to 9.2 per cent.

“Inflation pressure is intensifying into January and the tightening pressure will intensify, especially considering the stronger-than-expected fourth-quarter GDP growth,” said Isaac Meng, economist with BNP Paribas in Beijing.

Markets fall

Although the growth and inflation figures had been published in advance by local media, China’s main stock index shed 1 per cent as investors viewed the strong set of data as bolstering the case for tightening.

Local stocks fell on the news out of China, with a earlier losses exacerbated by an additional 20-point fall that took the market about 1 per cent lower on the day. The Australian dollar also fell about a quarter of a cent, to 99.54 US cents when the Chinese data was released.

Consumer prices rose 4.6 per cent in December from a year earlier, slowing from a 28-month high of 5.1 per cent in November but staying above forecasts for a steeper fall to 4.4 per cent.

More tightening ahead

China has officially raised banks’ required reserves seven times since the start of last year, with its most recent increase taking effect on Thursday.

But it has increased interest rates only twice during that time and some analysts warn that more forceful moves are needed.

The government is still debating the extent of credit curbs, and reports in recent days have pointed to a lower ceiling on bank lending than some investors had expected.

“Beijing still has more work to do to keep the economy on an even keel,” said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong. “Risks are skewed to more aggressive action.”

In a sign that the gradual tightening thus far has started to bite, China’s benchmark short-term money market rate spiked 194 basis points on Thursday, heading for its biggest single-day rise on record.

In month-on-month terms, the December numbers in fact registered a clear slackening of price pressures. Consumer prices rose 0.5 from the previous month, down from a 1.1 per cent rise in November.

Beijing has also nudged the yuan higher against the dollar over the past week, but that mini-burst of appreciation has been seen as politically motivated, aimed at softening US criticism of China’s currency policy during President Hu Jintao’s visit to Washington.

Analysts expect appreciation of just 5 per cent this year, with Hu himself saying that inflation was hardly the most important factor in determining the exchange rate.

Inflation worry

Weekly food price movements had long pointed to a decline in inflationary pressure in December, but many analysts also reckoned that any slowdown in inflation could be temporary.

Price pressures could pick up in January, because harsh winter weather could compound a surge in demand with the Lunar New Year holiday falling earlier in the calendar this year than in 2010.

Food price data compiled by the commerce ministry has showed that vegetables and meat have become more expensive since the start of the year.

“Growth momentum remains strong. However, inflation is the key focus of the market. It will be a challenging year for China to battle inflation,” said Dongming Xie, China economist at OCBC Bank in Singapore.

“December inflation is higher than our expectations. Food prices continued to go up in the first half of this month due to seasonal demand,” he said.

Ma Jiantang, chief of China’s statistics agency, said he was confident that China would be able to control inflation in 2011 and that steps to limit the amount of cash in the economy would be instrumental to taming price pressures.

Economists forecast that Chinese consumer price inflation will average 4.3 per cent this year, remaining above the government’s target of capping it at 4 per cent.

Economic growth is expected to slow to 9.3 per cent in 2011 from 10.2 per cent notched up last year.

Reuters

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Filed under: Beijing Consensus, Chinese Model, Domestic Growth, Economics, Inflation, National Medium- and Long- term Talent Development Plan, People, Politics, Population, Social, The Age

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