China's economy

On the rebound

A strong economic bounce increases the chance of a revaluation

THE restaurants and bars of Clarke Quay on the Singapore River hum with crowd-pleasing music, happy chatter—and bloodcurdling screams. Thrill-seekers can strap themselves into the G-Max Reverse Bungy, which flings them 60m upwards with the power of a slingshot. In the first quarter of this year Singapore’s economy performed a reverse bungy jump of its own. It grew at an annual pace of 32.1%, according to preliminary figures released on April 14th. Manufacturing shot up by 139%. The city-state’s authorities announced a “gradual” currency revaluation to reduce inflationary pressure.

Impressive in itself, Singapore’s economy may also be a bellwether for its bigger neighbours. On April 15th China reported that its economy grew by 11.9% in the year to the first quarter, its fastest pace since 2007. The strong figure increased speculation that China would follow in Singapore’s footsteps, allowing its currency to strengthen, as America and other countries have been pressing it to do. The yuan has been pegged tight to the dollar since July 2008, much to the consternation of its trading partners.

Despite the strong figures China's cabinet is still cautious

But China’s cabinet, the State Council, which met the day before its figures were announced, struck a note of caution. It believes the economy still owes its growth to the government’s stimulus package, rather than its own momentum. The expansion in the first quarter looks less striking when compared with the previous quarter, rather than the previous year. By this measure, it grew at an annualised rate of “only” 9.3%, reckons Tao Wang of UBS Securities—slower than the previous three quarters. That means the bungy cord is not about to snap, sending the economy flying into the air.

Inflation is still modest in both countries. China’s consumer-price inflation, at 2.4% in the year to March, was actually lower than the month before. In Singapore, consumer prices increased by only 1% in the year to February. But inflationary pressure is building beneath the surface. The price rises in both countries, though small, represent a conspicuous turnaround from the falling prices of last year. Singapore’s monetary authority believes its economy is now operating near its full potential. Many analysts think the same of China. Charles Dumas of Lombard Street Research in London thinks China’s economic output is now almost 6% above its sustainable level. He also finds it hard to believe that China’s real GDP grew by only 11.9% when nominal GDP (ie, before adjusting for inflation) grew by 17.3%.

Besides, Ms Wang argues that consumer-price inflation is not the best indicator of the macroeconomic hazards China may face. The authorities themselves seem more worried about property prices, which rose by 11.7% in China’s cities in the year to March. On April 15th they added to their recent “flurry of announcements and denouncements”, as Ms Wang puts it, by introducing new measures to curb property speculation. The government said it would increase downpayments on second and third homes, as well as first homes over 90 square metres. It set a floor to the mortgage rates banks may charge and said it would try to increase the supply of land (and curb land-hoarding) in booming markets.

Miserable savings rates push Chinese investors into property speculation

Not all Chinese homeowners borrow in order to buy. A quarter pay cash and the average mortgage covers only about half of a property’s value. Indeed, many Chinese savers sink money into property only because savings accounts offer such miserable returns. Deposit rates are capped at about 2.25%, which fails even to compensate savers for inflation.

The Chinese central bank is reluctant to raise interest rates, lest it tempt speculative inflows of capital, which can find ways of sneaking past the country’s capital controls. These inflows put upward pressure on the yuan, forcing the central bank to intervene heavily to keep it steady. A more flexible yuan might give the central bank more freedom to raise rates and curb property prices. It would be one way to take some of the boing out of the property bungy. Opinion among China’s various state bodies is said to be divided over whether to free the currency: those arguing in favour now have a stronger case.