8.7%, and getting hot, in China

China’s economy, puffed up by the steroid of stimulus, roared and expanded by 10.7% in the fourth quarter of 2009, capping full-year GDP growth at 8.7%, and flagging, to some economists, the risks of overheating unless brakes are applied soon.

The extraordinary burst of growth - the fastest pace since 2007 - was accompanied by rising inflation, which hardened expectations of monetary tightening, and sent the Hong Kong stock index spiralling down.

Releasing the robust data in Beijing, Ma Jiantang, head of the National Bureau of Statistics, noted that asset-price gains, particularly in property, were creating problems for the government to guide the economy.

Economist Nouriel Roubini, in Hong Kong to attend an economic forum, said it was necessary for Chinese policymakers to raises interest rates and implement other policies to control credit “because credit growth is expansive… and the economy is overheating, with inflationary pressures.”

It was better, he said, “to slow down sooner rather than letting it fester too long and having to do a much more sever tightening of policy in the second half of the year.” Even if in the short run markets react negatively, “doing it sooner rather than later is the right policy.”

RBS economist Ben Simpfendorfer noted that consumer price inflation was forecast to reach 4% year-on-year in the coming months. “Officials will thus be rightly concerned that household inflation expectations… are now worsening.” But the risk, he added was that officials “will not tighten sufficiently, raising the risks of overheating or a bubble in 2011.”

Other economists noted that the recovery, while strong, still needed to be nurtured. China’s economic recovery “is taking hold more strongly” and authorities “are now more confident about the domestic economic picture,” said JP Morgan chairman of China equities Jing Ulrich. “But there are still risks to the recovery, and therefore the exit strategy should be very gradual.”

Credit Suisse economist Dong Tao too felt although the latest data was “stronger than expected… and should give Beijing more confidence about the growth outlook,” it wasn’t sufficient to get Chinese officials to “accelerate the process of monetary tightening.”

For now, however, Tao says that China is “in a relatively sweet spot, where growth is strengthening while the ‘normalisation’ measures are still too mild to make a difference in the real economy.”