China Passing Peak in Growth Insufficient to Tame Inflation
By Bloomberg News
June 9 (Bloomberg) -- China’s policy makers may see evidence this week that economic growth peaked in the first quarter, strengthening their opposition to higher interest rates even as inflation accelerates.
Consumer prices jumped 3 percent, hitting the government’s targeted full-year ceiling, after a 2.8 percent increase in April, according to the median of 32 estimates in a Bloomberg News survey before the June 11 release. In contrast, lending, investment and industrial output figures due this week may show a slower pace of gains, according to survey estimates.
“We see some initial signs of cooling off, but the economy still has the risk of overheating and inflation is still a major risk,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. Slower growth is “exactly what China needs in order to prevent much higher inflation,” he said.
China’s rebound from the global recession has stoked consumer prices, and this month’s pay increases at Foxconn Technology Group and Honda Motor Co., along with higher minimum wages, mean the pressures may escalate. At the same time, Premier Wen Jiabao’s government has pledged to keep its policy stimulus in place for now, with Europe’s debt crisis posing dangers to the world recovery.
“Policy makers will likely take a ‘wait and see’ attitude,” Helen Qiao and Song Yu, Hong Kong based economists at Goldman Sachs Group Inc., wrote in a note this week. Officials are “unlikely to roll out further nationwide tightening measures in the near future.”
Yuan Appreciation
Besides maintaining one-year benchmark interest rates at crisis levels of 5.31 percent for lending and 2.25 percent for deposits, China has kept the yuan pegged at about 6.83 per dollar since July 2008. Investors buying yuan forwards may begin betting on declines by the Chinese currency against the dollar over the next year as the euro tumbles, according to Royal Bank of Scotland Plc.
The nation may remain in a “policy void” for the next two to three months as officials observe the sovereign-debt crisis and the effects of a crackdown on property speculation within China, Wang Qian, chief China economist at JPMorgan Chase & Co., said in Beijing yesterday.
A moderation in economic growth from 11.9 percent in the first quarter may help to avert the risk of a boom in the world’s third-biggest economy being followed by a bust. The Shanghai Composite Index has fallen 23 percent this year, Asia’s worst performer, partly on concern that the government will tighten policy excessively.
‘A Bit Overheated’
Justin Lin, the World Bank’s chief economist, said June 4 that first-quarter growth was “a bit overheated” and a small slowing would be a good thing. He’s likely to get his wish, with state economist Zhang Liqun estimating in a June 7 interview in Beijing that this quarter’s expansion may be between 10 percent and 11 percent. HSBC’s estimate is 10.5 percent, followed by 9.5 percent in the third quarter and 9 percent in the fourth.
Officials have already ordered banks to hold more of their assets in reserve, set a lower lending target for 2010, and drained liquidity through bill sales. Regulators have also restricted mortgage lending and raised down-payment requirements for home purchases.
This week’s data may show the impact from such efforts. New lending may have totaled 600 billion yuan in May, down from 774 billion yuan in April, according to the median forecast. M2, the broadest measure of money supply, may have expanded 21 percent from a year earlier, the least in 15 months.
Property Slowdown
Additionally, property-price gains may have slowed for the first time in almost a year. May’s increase was 12 percent, down from a record 12.8 percent in April, according to the median estimate in a separate survey.
Industrial production may have climbed 17 percent in May from a year earlier, slipping from a 17.8 percent increase in April. Baosteel Group Corp., the nation’s second-biggest steelmaker, said yesterday that demand from the automotive and home-appliance industries is “weak” and mills face a difficult second half of the year.
Urban fixed-asset investment may have gained 25.7 percent in the January-May period, compared with 26.1 percent in the first four months of the year, the survey showed.
China’s trade data, likely to show exports rising for a sixth month, is due tomorrow. Overseas shipments may have climbed 32 percent from a year earlier, with imports rising 45 percent, leaving an $8.2 billion trade surplus.
Inflation Peak
China’s inflation may peak at about 4.5 percent in the third quarter on food costs, economic growth and “excessive” credit, according to Qu. Morgan Stanley expects the high point to be about 4 percent, also next quarter.
Government efforts to control inflation may be aided by sliding commodity and vegetable costs. Bank of America-Merrill Lynch said June 4 that producer-price inflation may be “near the peak.” In May, prices rose 6.8 percent from a year earlier, the same pace as in April, the median forecast in the survey showed.
Retail-sales numbers will also be released on June 11. Economists’ median estimate is for an 18.5 percent increase in May, matching April’s gain.
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