WRAPUP 2-China’s strong start to 2010 backs tightening case

* China yr/yr growth spurts to 11.9 pct, beating forecasts

* Economists urge tighter policies to avert overheating

* Yuan rise still on cards; jury out on need for rate rise

By Zhou Xin and Simon Rabinovitch

BEIJING, April 15 (BestGrowthStock) – China chalked up unexpectedly
strong year-on-year growth in the first quarter of 11.9
percent, prompting renewed calls for tighter policies to
prevent the world’s third-largest economy from bubbling over.

The rate of expansion, the fastest since 2007 and above the
median forecast of 11.5 percent in a Reuters poll, was
flattered by a low base of comparison a year earlier, when the
economy was reeling from the global financial crisis.

But economists said the figures, released on Thursday by
the National Bureau of Statistics, were unquestionably sturdy
and would justify a firmer policy stance to nip inflation in
the bud.

“We think in absence of a dramatic fall in external demand,
it is critical for the government to tighten policy more
decisively than they have been doing in order to prevent
overheating,” Goldman Sachs economists Yu Song and Helen Qiao
said in a note to clients.
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Graphic on GDP:
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Graphic on industrial output and PMI
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Graphic on CPI and PPI
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Graphic on retail sales
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Stories on the Chinese economy
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However, not all economists said it was urgent for Beijing
to slam on the brakes. They noted that the government is
already winding back its anti-crisis investment spending and
has ordered banks to reduce new lending by more than 20 percent
in 2010.

And while property prices leapt 11.7 percent in the year to
March, consumer inflation remains under control. The consumer
price index rose 2.4 percent in the year to March, below market
expectations of a 2.6 percent increase.

“While we expect policy tightening over the coming quarter,
there is no need for dramatic measures,” said Mark Williams
with Capital Economics in London.

YUAN ON THE RISE?

So far this year the central bank has twice raised the
proportion of deposits that banks must hold in reserve and has
also aggressively drained cash from the banking system.

But unlike a clutch of Asian neighbours, including India
and Malaysia, China has kept its benchmark interest rates
unchanged even though it is leading the global recovery charge.

“The government is faced with an unpalatable choice: raise
rates and dampen the ardour of investors in the real estate
sector, or leave rates on hold and allow the property bubble to
expand further, and risk inflationary expectations taking
hold,” said Tom Orlik with Stone & McCarthy Research in
Beijing.

And unlike Singapore on Wednesday, China has not tightened
financial conditions by pushing up its exchange rate — despite
quiet, persistent pressure from the United States, which
believes a cheap yuan gives China an unfair edge in global
markets.

The Chinese Commerce Ministry on Thursday reaffirmed its
opposition to a stronger yuan, arguing that it would do nothing
to solve the problem of near double-digit U.S. unemployment.

However, Glenn Maguire, an economist with Societe Generale
in Hong Kong, said Thursday’s data deluge reinforced his
conviction that a revaluation of the yuan, and a widening of
the currency’s trading band, were imminent.

“It could happen any time,” Maguire said.

“Yuan stability and China’s stimulus package made an
enormous contribution to global stability in the aftermath of
the crisis, but now that China’s economy (Read more about the fastest growing economy.) is growing by 12
percent, it’s time for China to share some of that growth with
the rest of the world via appreciating its exchange rate,” he
said.

The reaction in financial markets to the figures was muted,
partly because they were circulating beforehand.
[ID:nTOE63D08S]

The yuan rose modestly in the offshore forwards market,
which was pricing in a 3.2 percent rise against the dollar over
the next year. (CNY1YNDFOR=: )

Instead of acting through interest rates or the exchange
rate, the central bank has relied so far on curbing credit
growth to keep the economy on an even keel.

This year’s quota for new bank lending has been cut to 7.5
trillion yuan from a record 9.6 trillion yuan in 2009 when
banks lent freely at the government’s behest to support a 4
trillion yuan fiscal stimulus package.

Ben Simpfendorfer, an economist with Royal Bank of Scotland
in Hong Kong, called Thursday’s data “a dangerous mix” because
the low inflation reading would delay a rise in borrowing
costs.

“Growth is running too hot. It requires policy tightening.”

A GOOD START

The State Council, China’s cabinet, promised on Wednesday
after reviewing the incoming data to stick to the
“appropriately loose” monetary stance and active fiscal policy
first adopted at the height of the global financial crisis in
late 2008.

Regardless of the degree of tightening, the first quarter
could well prove to be the high watermark for growth this year,
as the base of comparison will become increasingly demanding.

A Reuters poll issued on Wednesday projected 10 percent GDP
growth this year, which will almost certainly catapult China
past Japan and make it the biggest economy in the world after
the United States [ID:nTOE63B047].

In addition to quarterly GDP, China released a batch of
figures for March that were strong and close to expectations.

Retail sales rose 18.0 percent from a year earlier,
industrial output expanded 18.1 percent, and urban investment
in fixed assets such as roads and factories rose 26.4 percent
in the first quarter.

“This year, the economy’s momentum has increased. We are
off to a good start,” statistics office spokesman Li Xiaochao
said.

Stock Market Basics

(Additional reporting by Aileen Wang, Michael Wei, Langi
Chiang and Melanie Lee; Writing by Alan Wheatley; Editing by
Ken Wills)

WRAPUP 2-China’s strong start to 2010 backs tightening case