By Bloomberg News
Jan. 22 (Bloomberg) -- China’s stronger-than-anticipated economic rebound in the fourth quarter may make it harder for Premier Wen Jiabao to achieve one of his main goals for 2010: convincing the public that consumer prices won’t surge.
Inflation accelerated to a more-than-forecast 1.9 percent in December and gross domestic product climbed 10.7 percent, the National Bureau of Statistics said in Beijing yesterday. Since October, policy makers have said managing inflation expectations is one of the government’s central objectives.
“The impression that strong inflation is back clearly matters to officials seeking to dampen rising inflation expectations,” said Mark Williams, an economist at Capital Economics Ltd. in London who worked at the U.K. Treasury as an adviser on China from 2005 to 2007.
Policy makers will likely act sooner than previously anticipated to contain prices, a Bloomberg News survey of economists showed after yesterday’s report. The People’s Bank of China will raise interest rates by the end of June and also ratchet up banks’ reserve requirements, according to the median of 17 forecasts. A survey on Jan. 8 indicated the PBOC would wait until the third quarter before lifting borrowing costs.
Officials will also allow the yuan to appreciate after holding it unchanged since July 2008 to aid exporters, yesterday’s survey showed. The yuan will increase about 3 percent by the end of this year against the dollar.
Zhou Reaffirms Policy
Central bank Governor Zhou Xiaochuan reaffirmed the nation’s moderately loose monetary policy, according to a recording of comments he made at a government meeting in Beijing yesterday. Officials will focus on flexibility, supporting economic growth and controlling inflation expectations, while credit policy will ensure that money goes to key sectors of the economy, he said.
China’s government needs to clarify its inflation target to guide expectations, a lawmaker said at a forum in Beijing today.
Consumer-price gains should be kept between 3 percent and 5 percent when economic growth is 9 percent, said He Keng, deputy director of the finance and economic affairs committee of the National People’s Congress. A rate lower than 3 percent may damp economic activity, He said.
Inflation expectations are “strong” because of rapid credit growth in the first half of last year and may become excessive, adding to volatility in capital markets and causing social tension, the legislator said.
Fastest Since 2007
Yesterday’s data showed China’s quarterly growth accelerating to the fastest pace since 2007, capping Wen’s success in shielding the nation from the global recession and adding pressure to rein in a surge in credit.
The one-year swap rate, an indicator of future changes in borrowing costs, climbed and the People’s Bank of China guided three-month bill yields higher for the second time in two weeks.
“The inflation trend is too worrisome for the government and we will continue to see policy tightened,” said Isaac Meng, senior economist at BNP Paribas SA in Beijing.
Asset-price gains, particularly in property, are creating problems for the government to guide the economy, Ma Jiantang, the head of the statistics bureau, said after the release.
A fourth-quarter survey by the central bank across 50 cities showed that 46.8 percent of households viewed consumer prices as “too high to accept,” up from 45.2 percent in the previous three months. Chinese companies raising prices this year include Beijing Yanjing Brewery Co. and liquor maker Kweichow Moutai Co.
Biggest Auto Market
Williams of Capital Economics said that depressed year- earlier numbers are boosting the latest price figures. The economy and inflation slowed in late 2008 as the financial crisis reverberated through the global economy.
After last year overtaking the U.S. as the biggest auto market and Germany as the biggest exporter, China is poised to slot behind America this year as the second-largest economy. China’s GDP last year was 33.535 trillion yuan ($4.9 trillion), the statistics bureau said yesterday, almost the same as the World Bank’s 2008 estimate for Japan.
Bank of America-Merrill Lynch said that its estimates showed China didn’t surpass Japan last year.
“The good news is that the latest data from China, also Korea and other parts of the region including Australia, suggest the beginning of a strong economic recovery,” New York University professor Nouriel Roubini said in Hong Kong yesterday.
‘Super-loose’ Policies
“Paradoxically, this strong economic recovery implies that the super-loose monetary, fiscal and credit policy followed by China and other countries has to reverse itself or otherwise there is a risk of overheating and inflation,” Roubini said.
Besides inflation, Chinese policy makers face the risk of bubbles in property as money from abroad adds to the cash in the economy from unprecedented lending last year. Banking regulator Liu Mingkang confirmed Jan. 20 that lending limits exist for some banks and said credit growth will slow this year.
China’s steps of raising banks’ reserve requirements, increasing interbank rates and adding credit controls this month may help to avoid “even more severe tightening” in the second half of the year, Roubini said.
SJS Markets Ltd. revised up its 2010 inflation forecast to 4.1 percent from a previous 3.5 percent estimate. Citigroup Inc. increased its estimate to 3.7 percent from 3 percent.
Stimulus Package
Fourth-quarter economic growth was driven by an unprecedented $586 billion stimulus package, subsidies for consumer purchases and a credit-fueled investment boom. The property market has rebounded and a 13-month slump in exports ended last month. For the full year, GDP gained 8.7 percent, beating Wen’s 8 percent target.
Retail sales rose 16.9 percent last year after adjusting for consumer price changes, the bureau said. The government previously said that gain was the biggest since 1986.
The world may again this year count on China as the biggest engine of growth. The World Bank on Jan. 20 raised its forecast for the global expansion in 2010 to 2.7 percent from 2 percent in June, and predicted 9 percent growth in China.
Wen this week indicated that he’s putting more emphasis on monthly data than year-over-year figures exaggerated by the slowdown from late 2008. December retail sales of 1.26 trillion yuan compared with a previously announced 1.13 trillion yuan in November, indicating an increase of more than 11 percent.
Sales quickened in December on a year-earlier basis, climbing 17.5 percent, while industrial production increased at a slower pace of 18.5 percent, yesterday’s report showed. Urban fixed-asset investment jumped 30.5 percent in 2009, the statistics bureau said.
Producer prices climbed 1.7 percent in December, after declining for the previous 12 months, yesterday’s report showed. Consumer and producer prices both rose 1 percent from November.
China’s 2009 GDP growth rate was down from 9.6 percent in the previous year. The statistics bureau yesterday revised its estimate of growth in the third quarter of 2009 to 9.1 percent from 8.9 percent. It also changed the first-quarter figure to 6.2 percent from 6.1 percent.
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