China's economy probably grew 10.4% as exports boomed

April 18, 2007 - 0:0
HONG KONG (Bloomberg) -- China's economy, the world's fourth largest, probably grew more than 10 percent for the fifth straight quarter on booming exports and an investment rebound.

Gross domestic product expanded 10.4 percent from a year earlier, according to the median estimate of 24 economists surveyed by Bloomberg News, the same pace as in the fourth quarter. The statistics bureau will release first-quarter figures in Beijing on April 19.

China's foreign-exchange reserves grow by $1 million a minute, flooding the economy with cash and fueling investment and inflation. U.S. complaints to the World Trade Organization last week and lawmakers' claims the yuan is kept weak to make exports cheap have stoked trade tensions. Relations “with America, and increasingly Europe, are on the edge of major upheaval,” said Donald Straszheim, vice chairman of Roth Capital Partners LLC in Newport Beach, California. Growth “would not run nearly as fast except for the essentially pegged currency.” Treasury Secretary Henry Paulson last week called in Washington for China to allow the yuan to strengthen, while finance ministers and central bankers from the Group of Seven industrial nations said the currency should “move.” “Growth momentum in the Chinese economy has picked up again,” said Frank Gong, an economist at JPMorgan Chase & Co. in Hong Kong. “The bulging trade surplus has in turn further boosted overall liquidity in the financial system, leaving in place the fuel for rapid growth, future inflation and asset bubbles.”

Premier Wen Jiabao told lawmakers last month that China needs to boost consumption and limit environmental damage to sustain the expansion of the world's fastest-growing major economy. Growth is “unstable, imbalanced, uncoordinated and unsustainable,” the premier said.

China's economy has more than doubled in size since the end of 2000 and last year's 10.7 percent expansion was the biggest since 1995. Growth for each of the past four years was at least 10 percent.

The yuan, allowed to move 0.3 percent a day against the U.S. dollar, has strengthened 7.1 percent against that currency since a decade-long peg was scrapped in July 2005. -------------Factories, Real Estate

Urban investment in factories and real estate probably climbed 23 percent in the first three months from a year earlier, the survey showed. A National Development and Reform Commission statement indicated the jump was 25.3 percent. That compares with 13.8 percent in December and 24.5 percent for all of last year.

A flood of cash from overseas sales raises the risk of asset bubbles and bad loans. Exports surged 27.8 percent in the first quarter and pushed the trade surplus to $46.4 billion. The stock market rose to records and had the biggest one-day fall in a decade. Banks made 1.4 trillion yuan of new loans, nearly half the total for 2006.

The central bank raised interest rates once in the quarter and has ordered banks to set aside more money as reserves three times this year to curb lending and investment. “China's growth has shown clear signs of rebounding in the first two months, mainly on stronger growth in credit, investment and exports,” said Qu Hongbin, an economist at HSBC Holdings Plc in Hong Kong. “This raises the question of whether Beijing will slam on the brakes.”

Excessive investment may cause manufacturing overcapacity and deflation, turning a source of growth into a “curse,” the Asian Development Bank said last month.

China began to shut inefficient plants and curb investment last year in 11 industries including steel, coal, cement and aluminum, the government says. About 70 percent of 600 consumer goods were in oversupply, a Ministry of Commerce report said. “The government needs to take proactive tightening measures before bubbles are formed,” said Ha Jiming, chief economist at China International Capital Corp. in Hong Kong. “Also, inflation is creeping higher on food, which is a major cost for the poor, and this could cause social unrest.”

Consumer prices probably jumped 2.7 percent in March from a year earlier, compared with the central bank's target of 3 percent for 2007, according to the Bloomberg News survey. That is close to the benchmark one-year lending rate of 2.79 percent, encouraging households to move more money from bank deposits to the stock market.

“If the actual CPI inflation exceeds 3 percent, we believe it could be a stress test on the People's Bank of China's comfort zone for inflation,” said Liang Hong, an economist at Goldman Sachs Group Inc in Hong Kong.

While the government tries to cool lending, companies are bypassing banks to tap the stock market for money. Angang Steel Co., China's third-largest steelmaker by production, plans to sell shares to fund a 22.6 billion yuan steel mill.

China's economy will likely expand a slower 10 percent in the second quarter because of decade-high growth in the same period last year, the economists said. GDP will probably grow at 9.9 percent in 2007, the first deceleration in six years, the survey showed.