WRAPUP 4-China economy hums along, inflation under control

* China Q3 GDP up 9.6 pct y/y vs forecast 9.5 pct y/y

* Sept CPI up 3.6 pct y/y in line with forecasts

* Sept industry output up 13.3 pct y/y vs f’cast 13.6 pct
y/y

* Sept urban FAI up 24.5 pct y/y vs forecast 24.6 pct y/y
(Adds central banker comments in paras 13-14)

By Aileen Wang and Simon Rabinovitch

BEIJING, Oct 21 (BestGrowthStock) – China’s growth ebbed in the
third quarter while inflation edged higher, suggesting that the
world’s second-largest economy was far from overheating and
that an interest rate rise this week may be enough for now.

Coming a day ahead of G20 finance ministers’ meeting in
South Korea where the United States and others are expected to
push for a stronger Chinese currency, the data could in fact
lead Beijing to put appreciation back in the slow lane to
reflect the cooler economic conditions.

“The window for large yuan gains is closing fast. Export
growth is slowing and, assuming the current trend is sustained,
year-ago growth is on track to fall well below 10 percent,”
said Ben Simpfendorfer, an economist with RBS in Hong Kong.

The yuan has risen 2.36 percent since the end of August,
its quickest pace of appreciation since a revaluation in 2005.

The data published on Thursday was broadly in line with
forecasts, but was still something of a surprise after China’s
unexpected rate rise on Tuesday prompted speculation growth and
inflation would be much stronger than expected.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

September data suite: http://r.reuters.com/tuz49p

Analyst views: [ID:nTOE69J085]

Breakingviews:

— Beijing’s approach has flaws: [nLDE69K0O1]

— Efforts to cool economy come up short:
http://r.reuters.com/xyd59p

— Markets twitch on small tightening moves:
http://r.reuters.com/hyk29p
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“Chinese officials are likely feeling quite pleased with
the way the data are playing out,” said Brian Jackson, an
economist with Royal Bank of Canada, in Hong Kong.

“Policy measures put in place earlier this year appear to
have helped steer the Chinese economy through a middle course
between overheating and a serious downturn.”

Financial markets were largely unmoved by the data.

Economic growth dipped to 9.6 percent in the third quarter
from a year earlier, down from 10.3 percent in the second
quarter, data from the National Bureau of Statistics showed.
The consensus expectation was a 9.5 percent pace.

Much of the slowdown can be explained by a higher base of
comparison after China’s rebound last year from the global
financial crisis.

It also is a desired outcome for the government, which has
gradually withdrawn the monetary and fiscal stimulus that
powered the recovery.

Annual inflation rose in September to 3.6 percent, reaching
a 23-month high and smack in line with forecasts. Excluding
food prices, inflation slowed.

But industrial output — a key indicator of growth momentum
— eased to a 13.3 percent year-on-year increase, its lowest
pace in 13 months and missing forecasts of a 13.6 percent rise.

STEADY AFTER THE SURPRISE

China surprised markets on Tuesday as it attempted to cool
asset prices with its first increase in interest rates in
nearly three years. [ID:nSGE69I0HU]

In comments published on Thursday, central bank governor
Zhou Xiaochuan drew attention to a series of potential
pitfalls.

“Macro-economic risks linked to excessive liquidity,
inflation, asset bubbles and a cyclical rise in bad bank loans
are rising significantly,” he said. [ID:nTOE69K07D]

Yet with overall price pressures mild, many analysts think
Beijing can afford to wait until next year to gauge the impact
of higher rates before hiking them a second time.

“The GDP figure gave the central bank confidence to raise
interest rates,” said Nie Wen, an economist with Fortune Trust
in Shanghai.

“But most other countries are now implementing loose
monetary policies, like the United States, so it is not good
for China to raise interest rates again,” he said.

Simpfendorfer said the rates outlook would depend in large
part on the property sector. Despite a months-long campaign to
crack down on speculative buying, housing prices have started
to climb again and the government is determined to calm the
market.

In a statement accompanying the release of the data, the
statistics agency said China would maintain policy stability
and consistency, while also making measures more targeted and
flexible — code for minor adjustments rather than wholesale
abandonment of monetary policy that the government still
describes as “appropriately loose”.

INFLATION NEAR ITS PEAK

China’s inflation is not broad based. Food prices, which
account for a third of the country’s consumer price index, rose
by an annual 8.0 percent in September, while core non-food
inflation slowed to 1.4 percent from 1.5 percent a year
earlier.

With food prices still climbing, October’s inflation
reading could be higher again, but that could be the peak.

“We expect GDP growth to continue slowing to around 9
percent year-on-year in the coming quarters,” Sun Junwei,
HSBC’s China economist. “A negative output gap should further
ease underlying inflationary pressure.”

Because the interest rate rise was so unexpected, many in
the market had assumed that the growth and inflation figures
would be surprisingly strong.

In this cycle of growth, it appears that the Chinese
economy peaked in the first quarter, when it expanded 11.9
percent from a year earlier.

That may stand as the strongest quarter for years to come,
because the government is now trying to reform the economy,
shifting it away from high-octane investment growth and towards
greater reliance on domestic consumption.

(Additional reporting by Kevin Yao and Huang Yan; Editing
by Ken Wills & Kazunori Takada)

WRAPUP 4-China economy hums along, inflation under control