China says growth to quicken but no stimulus exit yet

BEIJING (Reuters) - China's economic growth is likely to speed up this quarter, but the government will stay the course on its fiscal stimulus and loose monetary policy, senior officials said on Monday.

Despite the emphasis on policy continuity, an unmistakable shift toward greater optimism in China's official rhetoric has led analysts to conclude that Beijing is thinking about how to start unwinding its ultra-loose pro-growth policies.

Restating the thrust of a cabinet statement issued last week, Vice Premier Li Keqiang said the economy had performed better than expected and its recovery was now on solid ground.

"The pace of growth is quickening quarter by quarter," Li told an international tax conference. "China is confident and is capable of achieving its full-year economic targets."

The upturn in growth has also put China on track to meet its budget targets after a difficult start to the year, giving it the fiscal firepower to continue supporting the economy, Vice Finance Minister Wang Jun told the conference.

Driving home the point that Beijing feels little pressure to tighten policy, central bank vice governor Yi Gang told a separate forum that the country faced no serious inflation threat for the foreseeable future.

"Our near-term policy will focus on preventing deflation, but we should also have a balanced policy and adopt a forward-looking view," Yi said, adding he expected consumer price inflation to turn positive on a yearly basis this quarter after eight straight months in negative territory.

FASTER GROWTH

China set itself a goal this year of 8 percent growth, which officials see as the minimum needed to maintain social stability, and there is little doubt it will hit that mark. GDP growth accelerated to 8.9 percent last quarter, compared with a year earlier, from 7.9 percent in the April-June quarter.

Noting that the road ahead was still strewn with obstacles, Vice Premier Li said the government would continue the "active fiscal and appropriately loose monetary policies" it adopted late last year when collapsing exports brought the world economy's woes to China's shores.

Beijing's 4 trillion yuan ($585 billion) stimulus package, complemented by a surge in bank lending, has been the centerpiece of efforts to revive the economy. In the process it has weighed on the government's books.

Nationwide expenditures were up a more-than-budgeted 24.1 percent in the first nine months from a year earlier and revenues were up a less-than-budgeted 5.3 percent, casting some doubt on whether Beijing could hit its goal of a 950 billion yuan deficit.

But Vice Finance Minister Wang said there had been a clear improvement in revenue growth in recent months, a trend that would only become stronger over the fourth quarter, in part because last year provided a low base of comparison.

"I am confident that, through our efforts, we will achieve the full-year budget target," he said. "We will work out various measures to increase revenues and cut expenditures but will also ensure that the active stimulus measures remain unchanged."

EXIT PLANNING

Still, international economic officials attending the Beijing conference said the time was ripe for countries to start making plans, especially for how to rein in bloated budget deficits.

"While it is still too early to exit support provided by fiscal and monetary policies, this is an appropriate time to begin the work of planning how we should exit from the deteriorated fiscal positions that have developed as a result of, and in response to, the crisis," Takatoshi Kato, an International Monetary Fund deputy managing director, said.

Angel Gurria, secretary-general of the Paris-based Organization for Economic Cooperation and Development, echoed this view.

"I would recommend...that in every country we start looking at fiscal consolidation -- that means, when are you going to be removing and then what do you do with this enormous growth of the debt," he said. Gurria cited the United States, Britain and Italy as examples of countries that needed to act.

China was in better shape because it entered the crisis with a fiscal surplus and had designed an ideal stimulus package, speedily ramping up spending, Gurria said.

"It is front-loaded. Most of it has already been spent," he said. "This is different, for example, from the United States' stimulus package, which mostly is more back-loaded, more toward 2010 perhaps, even 2011."

Economists at the Development Research Center, the State Council's think-tank, backed the view that Beijing should be ready to tweak policy to nip the threat of inflation in the bud -- even though consumer prices are still falling year on year.

"If money supply continues to grow rapidly, China will again face the danger of inflation by the end of the second quarter next year," Fan Jianjun, a finance researcher with the DRC wrote in China Economic Times, a paper published by the think-tank.

Fan said inflation could reach 4 percent by mid-year. Writing in the same paper, fellow researcher Li Jianwei said inflation could keep climbing and hit 5 percent by the end of 2010.

($1=6.827 Yuan)

(Additional reporting by Zhou Xin; Editing by Alan Wheatley)