China’s first-quarter GDP flies 11.1%

HONG KONG: China’s runaway economy surged 11.1% in the first quarter of 2007 despite recent efforts to cool it down, prompting policymakers to flag the risk of “overheating”, and sealing the certainty of an interest rate hike — perhaps as early as Friday.

That was enough to bring down the stock markets in Asia led by Shanghai, which fell 4.5% in anticipation of higher borrowing costs.

The stronger-than-forecast growth for the world’s fourth-largest economy was compounded by a galloping inflation rate, triggered largely by rising food prices: at 3.3% year-on-year in March, CPI inflation rate overshot the People’s Bank of China’s 3% target for the year.

Foreign exchange reserves data presented yet another statistical bombshell: reserves rose $135.7 billion in Q1, or an average of $2.3 billion for every working day!

“If such fast growth continues,” cautioned National Bureau of Statistics spokesperson Li Xiaochao, “there is the risk of shifting from fast growth to overheating.” 

Premier Wen Jiabao noted in a statement that loan growth was “too fast”, fixed-asset investment was rebounding and the trade surplus continued to increase. “China will keep strengthening control on investment, loans and growth in the trade surplus and maintain stable prices,” he pledged.

Several other data points caused disquiet among China-watching economists. HSBC economist Qu Hongbin noted that the central bank had been tightening policy for four years now, “but credit and investment is still growing excessively… This raises the question of whether its current approach, mainly quantitative tightening, is working.”

As for the rising foreign exchange reserve, Qu noted that the central bank’s recent move to moderately accelerate the pace of appreciation of the yuan had had an “undesirable consequence” - that is, generating greater expectations about currency appreciation.

Lehman Brothers’ economist Mingchun Sun said: “One unwelcome sign was urban fixed-asset investment growing 25.3% y-o-y versus 23.4% in February, suggesting investment is reaccelerating.”

Likewise, industrial production growth grew 18.3% in Q1, against 14.8% in Q4 2006.

“The stronger-than-expected data suggest that the government will likely introduce another round of tightening measures very soon,” Sun added.

In addition to a rate hike - widely expected to be of the order of 0.27 percentage points - the tightening could take the form of further hikes in the reserve requirement ratio, more measures to cool investments and further cuts in export VAT rebates.

UBS chief Asia economist Jonathan Anderson, however, said although the overall real growth of 11.1% was "seemingly inconsistent with our view of a slowing economy this year," Q1 data were "unusually wacky".

This "temporary blip", he felt, was driven by a "strong one-off inflow of liquidity from the Ministry of Finance, a rush of heavy industrial export-related production as suppliers attempted to 'front-run' policy changes and a resulting 'blowout' in the trade balance."

"We expect this to reverse itself very quickly, and expect the second quarter numbers to be back to normal," Anderson added.

Will Chinese authorities be required to slam the brakes harder? Not at all, reckon the economists.

"The People's Bank of China is likely to become a bit more aggressive on tightening, but it won't slam the brakes," says Qu.

Given the proximity of two major events - the Communist Party congress in autumn and the 2008 Beijing Olympics - "senior leaders have no interest in introducing tougher measures that might cause big swings in growth."

Adds Anderson: "The high GDP growth number is temporary and does not call for a strong tightening going forward."