International | Apr 15 2010
By Rudi Filapek-Vandyck
China's March quarter GDP growth once again surprised to the upside, beating market expectations by almost 50 basis points, but the jury is still out whether this automatically implies Chinese authorities are ready to announce further cooling measures.
China's Q1 annual GDP growth jumped to 11.9%, according to the National Bureau of Statistics. Separate polls by Dow Jones Newswires and Reuters had put expected GDP growth at 11.5%. (Note the 11.9% was leaked yesterday already and should thus not have come as too large a surprise for most traders in the market).
The Q1 result was also markedly above the 10.7% year-on-year increase posted in the closing quarter of 2009, suggesting the Chinese economy is about to run away from sustainable levels, making imminent policy responses a necessity if rulers in Beijing are serious in their pledge to opt for slower, sustainable growth.
However, as per usual, not everything is what it seems at first glance in China. Analysts at DBS highlighted prior to today's release that in quarter-on-quarter terms economic growth in China is slowing rather than accelerating. Their first suggestion was thus that Chinese tightening might not be as imminent as economists outside the country would assume.
Note, however, that DBS was still working off an estimated growth pace of 11.5%, or 40 basis points below what the actual figure turned out to be.
Nevertheless, there are others with a degree in economics around who also think Chinese interest rates might not rise this year at all. Beijing is believed to stick to quantitative measures instead, such as reigning in bank loans.
One of these experts is Li Yang, former adviser to the People's Bank of China and currently vice president of the Chinese Academy of Social Sciences. In an interview with Dow Jones Newswires, Li Yang said an increase in interest rates may not be as close as many economists expect.
Again it has to be noted the former adviser to the People's Bank of China was working off a projected pace of growth in Q1 of “more than 11%” while the actual release almost hit 12%.
On the inflation front, March's consumer price index was 2.4% higher than a year earlier, while the producer price index was up 5.9%. Both Dow Jones Newswires and Reuters had expected a 2.6% rise in CPI, compared with February's 2.7% gain. In other words: the US is almost facing negative inflation, while China has inflation, but still only modestly so.
Does this mean Chinese interest rates will remain untouched for an extended amount of time as well?
Note that China has, contrary to the US, fast growing property prices and authorities remain keen in stopping that runaway train.
Another observation worth noting is that China's growth rate in the first three months of this year is the highest since 2007, when the economy expanded by 13%.
Earlier this week, the Asian Development Bank (ADB) lifted its forecast for China's 2010 Gross Domestic Product (GDP) growth while lowering its forecast for 2011 due to expected monetary tightening measures.
ADB estimates China's GDP will grow by 9.6% in 2010, higher than the 8.9% forecast made in last September.
Additionally, a survey of 35 economists conducted over the past week suggests the world's third-largest economy will grow by 10.0% this year and by 9.2% in 2011. These figures are up from 9.5% and 9.0% respectively in the previous quarterly poll conducted by Reuters in January.
The Chinese economy grew by 8.7% in 2009.
See also: "Rudi's View: Yuan Revaluation Over-Hyped"
Note also that domestic demand maintained strong momentum with industrial production rising 18.1% (y/y) in March compared with a 12.8% gain in Jan-Feb. Retail sales grew 18% from 17.9% in Jan-Feb. Fixed asset investment rose 26.4%, down slightly from 26.6% during Jan and Feb.
Economists at ANZ Bank point out that CPI inflation eased to 2.4% (y/y) in Mar from Feb’s 2.7%, but inflation momentum has nevertheless picked up strongly on a 3m/3m basis, "suggesting CPI inflation will soon breach the government targeted rate of 3%". ANZ notes PPI inflation accelerated to 5.9%, which is 0.5ppt higher than Feb on rising energy and commodity prices. This, say the economists, will soon pass on to consumer prices. Meanwhile, the average housing price rose 11.7% nationwide, risking a property bubble.
Here's the full assessment of today's data by ANZ Bank:
"The stronger-than-expected Q1 growth, fuelled by a combination of factors such as low base effects, strong domestic demand, and a rebound in external demand, suggests the economy has already overheated. Two quarters of positive and substantial output gap, together with a large money overhang, foreshadow the risk of surging inflation months ahead. Meanwhile, the negative real interest rate has also stoked speculative activities in the property market, risking an asset bubble. China’s growth has also propelled a rapid ascend of global commodities prices, which in turn forced China to import inflation with a pegged exchange rate regime. Going forward, the authorities will have to apply all instruments at disposal, especially those price-based policy tools such as interest rate and the RMB exchange rate, to manage inflation expectations and contain the risk of run-away inflation."