April 15, 2010Chinese Economy Grows 11.9%, Highlighting Threat of Overheating
China’s economic growth accelerated to the fastest pace in almost three years in the first quarter, highlighting overheating risks that may prompt the government to scrap the yuan’s peg to the dollar.
Gross domestic product rose 11.9 percent from a year earlier, the statistics bureau said at a briefing in Beijing today. That was more than the median 11.7 percent estimate in a survey of 24 economists.
A lower-than-estimated gain in consumer prices complicates a debate in Beijing on when to raise interest rates, cut in 2008 to counter the financial crisis. Australia and India have already moved and Singapore yesterday allowed a one-time revaluation of its currency as the region winds back stimulus policies to limit asset-bubble and inflation risks.
“The next policy move remains likely to be a yuan revaluation,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. Inflation data may lead the central bank to delay an interest-rate increase until the second half of the year, he said.
After the GDP announcement and this week’s report of a record jump in property prices, the government today announced measures to cool the real-estate market, including requirements for bigger home down payments. The government also said it will study extra taxes, including on individuals’ profits from property sales.
Bubble Concern
Some investors, including hedge fund manager Jim Chanos, already see a property bubble in China that could reverberate around the world if it bursts. “The case for policy tightening remains intact given the risks of China’s economy overheating,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “The additional measures announced today suggest policy makers remain reluctant to use the blunt instrument of higher interest rates, but it is unlikely that extra fine-tuning will be enough to slow down the property market.”
Consumer prices rose 2.4 percent in March from a year earlier, today’s data showed, compared with 2.7 percent in February. Economists’ median estimate was 2.6 percent.
Non-deliverable yuan forwards climbed 0.2 percent to 6.6123 per dollar as of 5:42 p.m. in Hong Kong, suggesting the currency may strengthen more than 3 percent in the next 12 months. The Shanghai Composite Index closed little changed.
Inflation Pressures
While food drove inflation in the first quarter, labor and raw-material costs are also rising, meaning it may be difficult to cap inflation at the government’s 3 percent target for the year, statistics bureau spokesman Li Xiaochao said today. The National Development and Reform Commission said separately that first-half inflation may be about 2.5 percent.
Industrial production climbed 18.1 percent in March, less than a 20.7 percent gain in the first two months, and retail sales increased 18 percent, today’s data showed. Car sales leapt 76 percent in the first quarter from a year earlier, with Mercedes-Benz (China) Ltd. reporting a doubling.
Instead of raising rates, China has targeted a 22 percent reduction in new loans from a record of $1.4 trillion last year and twice asked lenders to set aside more cash as reserves. The central bank could again increase reserve requirements as early as today, Singapore’s United Overseas Bank Ltd. said.
Interest Rates
Economists are split on when borrowing costs may increase. Royal Bank of Canada predicts a move this month, while Bank of America-Merrill Lynch says the fourth quarter. The last time China’s growth accelerated to more than 11 percent, in the first quarter of 2006, the central bank raised rates within a month.
China’s cabinet yesterday signaled caution in ending crisis policies, saying first-quarter economic growth was largely driven by stimulus policies and a comparison with low levels in 2009. While merchandise exports rebounded, imports grew at a faster pace.
Investment contributed 6.9 percentage points to growth, consumption accounted for 6.2 points and net exports deducted 1.2 points, the statistics bureau said today. China may post more trade deficits in the first half after the first shortfall in six years in March, the commerce ministry said today.
Urban fixed-asset investment increased 26.4 percent in the first quarter from a year earlier, the statistics bureau said today. Producer prices rose a less-than-estimated 5.9 percent in March, after climbing 5.4 percent in February.
Ratcheting Up Forecasts
While China doesn’t release quarter-on-quarter figures, Royal Bank of Scotland estimated 14.5 percent economic growth on that basis. The median of seven economists’ estimates was 11.2 percent.
Citigroup Inc. today raised its 2010 growth forecast for China to 10.5 percent from 9.8 percent. JPMorgan Chase & Co. increased to 10.8 percent from 10 percent. RBS estimated 11 percent, up from 10 percent.
U.S. Treasury Secretary Timothy F. Geithner’s unscheduled meeting with Chinese Vice Premier Wang Qishan in Beijing on April 8 fueled speculation that the yuan’s 21-month-old peg at about 6.83 per dollar may be scrapped amid calls in Congress to brand China a currency manipulator.
Residential and commercial real-estate prices in 70 cities climbed 11.7 percent in March from a year earlier, the most since data began in 2005.
AP
_____November 2009__
China should drop Yuan's dollar peg and follow Singapore's lead : Merrill Lynch
5 November 2009
China should unshackle the yuan from its dollar peg and follow Singapore's lead in targeting a basket of currencies to determine its exchange rate Merrill Lynch's China economist said on Wednesday.
Linking the yuan to the dollar had done China more harm than good over the past two years, attracting both hot money inflows and international criticism, but a sudden shift to a fully market-determined exchange rate was off the table, Ting Lu said.
"The most important question is how to appreciate," he said. "We can find a middle path. We should fix the yuan to a basket of currencies."
The Singapore dollar provides China with a good model, said Lu, who is based in Hong Kong with Bank of America Merrill Lynch.
The Monetary Authority of Singapore manages the currency's value in a secret trade-weighted band against a basket of currencies, giving it the flexibility to track other Asian currencies up and down against the US dollar.
After removing the yuan from a formal decade-old dollar peg in July 2005, the People's Bank of China said that it would manage the exchange rate against a basket of currencies, but, in practice, the yuan has remained closely tied to the dollar.
China has kept the yuan almost entirely flat against the dollar since the middle of last year when the financial crisis worsened, fuelling growing anger abroad in recent months as dollar weakness has led the yuan to depreciate against most of China's trading partners despite the economy's manifest strength.
"Next year, or even earlier, the People's Bank should publicly announce that it will once again use a basket," Lu said, noting that the central bank seemed to have experimented with basket-referenced management for a month or so early last year.
As in Singapore, he said that Beijing should keep the composition of the basket a secret.
By targeting a basket of currencies rather than single one, Singapore's currency regime also deters speculation by creating uncertainty in the minds of traders as to where the exact intervention bounds may lie.
Fending off speculative inflows has been a chief problem for China in reforming the yuan. Its gradual climb against the dollar from 2005 to 2008 sucked in hot money as investors viewed appreciation as a one-way bet.
Some analysts have called now for a large one-off revaluation, pushing the yuan to a high enough level to sew doubts about whether it will appreciate further.
But Lu dismissed such a strategy, saying that it would be hard to squelch all appreciation expectations and that returning the yuan to a de facto dollar peg after revaluation would only invite more foreign criticism down the road.
economic times
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Singapore revalues currency after first-quarter-growth surge
