China's Growth May Top 11% Even as Officials Rein in Lending

Tuesday, 16 February 2010

China’s economy, the world’s third biggest, may expand at a faster pace in 2010 even as officials cool lending to restrain inflation and avert asset bubbles. Goldman Sachs Group Inc. maintained its forecast for 11.4 percent growth after the central bank raised reserve requirements for lenders on Feb. 12. That compares with an 8.7 percent expansion last year. Declines in stocks and commodities because of the reserve- ratio announcement highlighted concern that monetary tightening in China may trigger a slowdown that undermines the global recovery.

Rebounding exports, up for a second month in January, may boost a Chinese economy that last year depended on its own stimulus-fueled investment and consumption for growth. “The Chinese economy is in good shape and exports will be the biggest swing factor this year,” said Lu Ting, a Hong Kong-based economist for Bank of America-Merrill Lynch.

“Outside of China, people underestimate the government’s ability to manage the economy and the stimulus exit.” Merrill forecasts 10.1 percent growth and Capital Economics Ltd. sees a 10 percent gain, estimates unchanged from before the reserve-ratio announcement that takes effect Feb. 25. The Chinese central bank moved after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) target for lending in January and property prices climbed the most in 21 months. Since October, policy makers have said managing inflation expectations is one of the government’s key objectives.

Consumer prices rose 1.5 percent in January from a year earlier, the third straight advance. Weakness in Europe Foreign companies are relying on growth in emerging economies such as China to prop up earnings as unemployment restrains U.S. demand and the Greek debt crisis highlights weakness in Europe. London-based Rio Tinto Group, the world’s second-biggest iron-ore producer, said last week that China became its largest single market in 2009. The Asian nation supplanted Germany as the world’s biggest exporter last year and is poised to replace Japan as the No. 2 economy behind the U.S. in 2010.

“The Chinese authorities are clearly trying to bring excessive bank lending under control,” Stephen Roach, the chairman of Morgan Stanley Asia Ltd., said in an interview in Mumbai on Feb. 12. The rest of the world should “take a lesson from what China is doing in moving much more aggressively to adapt to the post-crisis exit strategy.” Holiday Cash The central bank on Jan. 12 increased reserve requirements for the first time since June 2008. The latest move was triggered by the need to soak up money from maturing central- bank bills and cash added to the financial system for this week’s Lunar New Year holiday, according to China International Capital Corp., the top brokerage for China research based on a 2009 survey by Asiamoney magazine.

The central bank aims to “gradually guide monetary conditions back to normal levels” from the “crisis mode” that saw an unprecedented 9.59 trillion yuan of lending in 2009, officials said in a Feb. 11 report. Inflows of overseas capital, which helped push foreign-exchange reserves to a record $2.4 trillion in December, are complicating efforts to prevent the fastest-growing major economy from overheating. The central bank may increase reserve requirements by another 1.5 percentage points this year on top of the latest 0.5 point increase, according to Merrill’s Lu. Benchmark interest rates may rise in the second half of the year, he said.

Yuan, Interest Rates “There is a case for an early interest-rate hike, possibly as soon as March, in order to keep inflation expectations in check,” said Mark Williams, an economist at Capital Economics in London who worked at the U.K. Treasury as an adviser on China from 2005 to 2007. The reserve-ratio move was accompanied by speculation that the government could also loosen the peg that has kept the yuan at about 6.83 per dollar since July 2008, shielding the nation’s exporters from weakness in global demand. U.S. President Barack Obama said in a Feb. 9 interview with Bloomberg BusinessWeek that a stronger currency would help China to deal with “a bunch of bubbles” in its “potentially overheating” economy.

Yuan forwards indicate that the Chinese currency may appreciate 2.3 percent against the dollar in the next year. “I have a strong opinion that they’re close to moving the exchange rate,” Jim O’Neill, London-based chief global economist at Goldman Sachs, said in an interview on Feb. 12. “I think something’s brewing.” O’Neill, who coined the terms BRICs in 2001 for the fast- growing economies of Brazil, Russia, India and China, said that Chinese policy objectives were shifting to keeping inflation under control and the odds had increased of a one-off revaluation of the currency. The reserve-ratio increase signals that “they’re getting better at bubble prevention,” he said.

Source: Bloomberg