I think a currency adjustment is on the way within month.
Reuters
UPDATE - China GDP up 9.7 pct, investment surge a worry
Thursday April 15, 4:59 am ET
(By Tamora Vidaillet
BEIJING, April 15 (Reuters) - China's economy expanded 9.7 percent in the year through the first quarter as heavy investment helped to extend rapid growth that is fanning fears of economic overheating and expectations of further credit tightening.
The third straight quarter of annual growth over nine percent came despite a government campaign to bring growth closer to an official seven percent target that is seen as more sustainable.
The growth was stronger than some had expected and economists said it could lead to further tightening. Tougher rules for investment in rapidly expanding industries such as property, steel and cement are also thought possible.
Fixed-asset investment -- spending on roads, power plants and other projects -- was 43.5 percent higher in March than a year earlier, statistics bureau spokesman Zheng Jingping told a news conference.
"The scale of fixed asset investment was too large and the growth too fast," Zheng said.
Many economists zeroed in on the investment boom.
"It does make us worry more. They're failing to hold it back. The faster it grows, the higher it rises, the further it has to fall, eventually," said JP Morgan economist Ben Simpfendorfer.
The consumer price index, watched closely for signs that over-investment is driving inflation, rose three percent in the year to March, below the five percent mark widely seen as worrying. But producer prices, seen as an indicator of future consumer price rises, rose 3.9 percent.
"I'm not so worried about inflation. Inflation of two to three percent is OK," said Chris Leung, an economist at DBS who had expected GDP growth of about nine percent.
"If they don't control fixed-asset investment it will come back to haunt the banking sector. I think China will probably raise (bank) reserve requirements again in the second quarter," Leung said.
The official GDP figures measure growth during the past year, but Goldman Sachs economist Hong Liang estimated that between the two latest quarters the economy had grown at a phenomenal 16 percent annualised rate.
She warned that such unofficial calculations, adjusting for seasonal patterns, could not be entirely unreliable.
CURRENCY PRESSURE
If inflation takes off it could pressure China to adjust its fixed currency, the yuan, which some economists say is undervalued at its current level of 8.28 to the dollar.
Rising raw material and energy prices were not being reflected in factory-gate prices of industries, whose profits might be squeezed as a result, Zheng said. But the higher cost of those inputs could translate into consumer price rises in the near future, he said.
Economists say that could help push inflation high enough to prompt rises in interest rates or the yuan.
"There is a time lag for price rises of upstream products to filter through to price rises of products downstream, but such a lag won't take very long," Zheng said.
"Rising prices of upstream products are putting pressure on overall prices."
Still, some economists think China is unlikely to move on the yuan any time soon.
"The possibility of this (yuan adjustment) happening this year is small, given that U.S. pressure seems to be subsiding and it takes a long time for technical preparations, including all the hedging instruments," said Deutsche Bank economist Jun Ma.
"I think it is more likely to be next year," Ma said.
COOLING STEPS
Zheng, who said high investment had caused bottlenecks in the supply of raw materials and energy and driven prices higher, sidestepped questions on whether the economy was overheating and whether China would adopt more tightening measures.
But he said ill-considered investments in duplicate construction projects in certain industries and selected areas had not been put under effective control.
Government measures to cool investment, including in banks' reserve ratio requirements, would take effect in the coming months, he said.
"The growth rate (of fixed asset investment) will definitely change after taking measures. It's unlikely to continue at such high speed," he said.
Increasingly worried that the investment boom could turn to bust, the central bank has raised bank reserve ratio requirements three times in the past seven months. With more money kept in reserve, banks are unable to lend as much, holding down the country's frenzied credit growth.
On Sunday the State Council vowed to take resolute steps to ward off inflation and "ups and downs" in the economy.
But the most recent figures give little sign economic growth is slowing.
China's factory output was 19.4 percent higher in March than a year earlier, and exports were 43 percent higher.
The broad money supply grew 19.2 percent in the year to March 31, well ahead of a government target of about 17 percent and close to 2003's level.
Retail sales, which have slowly gathered strength in recent months, rose 11.1 percent in the year through March.
Zhang declined to give any forecast for growth this year, but said the bureau was confident of achieving the seven percent target. |
