China economy slows a touch

By Eadie Chen and Simon Rabinovitch

BEIJING (Reuters) - China shrugged off atrocious winter weather and a global credit crunch to post surprisingly strong economic growth of 10.6 percent for the first quarter.

The outcome will be welcome to global policy makers, who are looking to big emerging markets such as China to take up some of the slack in the world economy as the United States teeters on the brink of recession.

Annual gross domestic product growth dropped from 11.2 percent in the final quarter of 2007, the National Bureau of Statistics said on Wednesday, but it beat market forecasts of 10 percent despite a drive by the central bank to rein in lending.

"Currently, the overall economic picture is better than we had expected," China's State Council, or cabinet, said after a regular meeting.

"The most pronounced economic problem is that the overall price level remains high," it added in its statement that followed the publication of the data.

With consumer price inflation remaining high at 8.3 percent in the year to March, albeit down from near-12-year highs of 8.7 percent in February, economists said Beijing would be wary of relaxing policy despite fears for China's export prospects.

"The headline GDP number was slightly on the strong side and, given that we had the snowstorm and tightening measures in the first quarter, this will give reason for the government to continue with its tightening bias," said Kelvin Lau, an economist at Standard Chartered Bank in Hong Kong.

In fact, there was an immediate response, the central bank announcing an increase of 0.5 percentage point in big banks' reserve requirements to 16 percent from April 25. It was the 16th increase since the middle of 2006.

"The fact that they've moved immediately in response to the data today neatly highlights just how strong the Chinese economy remains at this stage," said Glenn Maguire, an economist at Societe Generale in Hong Kong.

The economic data showed inflation remained largely confined to food, which cost 21 percent more in the first quarter than a year earlier.

Consumer prices were up 8.0 percent overall, but only 1.2 percent excluding food. Economists, however, said price pressures were building up: annual factory-gate inflation leapt to 8.0 percent in the year to March from 6.6 percent in February.

"It is still too early for the government to claim victory for their inflation battle," Hong Liang and Yu Song with Goldman Sachs said in a note to clients.

They expected the central bank to maintain its strict credit controls, raise interest rates twice this year and keep pushing up the yuan's exchange rate at a faster pace.

HOSTAGE TO EXPORTS

But some economists said Beijing was likely to alter its policy stance as growth slowed and inflation concerns waned.