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ANALYSTS' VIEW: Brighter China GDP outlook spurs policy debate

BEIJING (Reuters) - China’s annual GDP growth accelerated to 7.9 percent in the second quarter from 6.1 percent in the first quarter, fanning a debate as to how the central bank might adjust its “appropriately loose” monetary policy.

Following are later comments by economists on the data:

FRANK GONG, ECONOMIST AT J.P. MORGAN, HONG KONG:

GDP forecasts raised to 8.4 percent (previously 7.8 percent) for 2009 and to 9.0 percent (8.5 percent) for 2010.

“Although public spending could level off and the lift from the inventory cycle could ease, we believe that a sustained pick-up in China’s private investment and consumption demand, together with a decent recovery in the global economy in 2H09, will sustain the economy’s above-trend growth in coming quarters.”

Interest rates to stay on hold till fourth quarter of 2010.

“On the policy front, given surprisingly strong loan growth, rising inflation expectations, and the surge in domestic asset prices, the central bank is fine-tuning its highly accommodative monetary policy stance in our view, relying on open market operation to restrain liquidity.

“In particular, we believe policymakers will likely increase scrutiny of new bank loans, especially short-term loans and bill financing, and use targeted central bank bills and/or window guidance to prevent bank lending from accelerating further.

“That said, we believe policymakers in China are unlikely to came out with drastic tightening measures on the monetary front, as external demand remains weak and inflation pressure is still subdued.”

TIM CONDON, HEAD OF ASIA RESEARCH, ING, SINGAPORE:

“It’s clear to me that China is really successfully shifting from export-driven growth to domestic-driven growth. It’s very encouraging.

“We have revised our 2009 GDP forecast to 8.3 percent from 7.5 percent.

“There has been a bit of tightening on liquidity. I think the data may bring forward the timing of the first rate hike. We predict the first hike in the first quarter of 2010. The consensus is probably later than that, and the consensus is that China can keep this very loose policy for a very long time.”

MINGCHUN SUN, NOMURA, HONG KONG:

“The mix of a strong economic recovery and prolonged deflation presents a challenge to policymakers.

“On the one hand, they are likely more confident about the growth outlook. Given surges in bank lending and the planned investment amount of newly started FAI projects, policymakers may start worrying about excess liquidity, overinvestment and asset price inflation in 2010 and beyond.

“On the other hand, prolonged deflation -- a reflection not only of base effects but also overcapacity and still insufficient demand -- may be a concern and tie their hands on any potential aggressive tightening.

“As a result, we judge the government will shift its policy focus from boosting economic growth to preventing overinvestment and asset price inflation, though only gradually. We expect a slew of targeted tightening measures in the coming months, aimed at reining in bank lending and FAI growth, and cooling the property and equity markets.

“However, these measures are likely to be technical and mild. In our view, a strong economic recovery, low inflation, loose liquidity and a benign policy environment provide ideal circumstances for the growth of asset price bubbles.”

BRIAN JACKSON, ECONOMIST, ROYAL BANK OF CANADA, HONG KONG:

“Today’s data show that Chinese policymakers have been successful in turning growth around, but looking forward the main question is how long will they keep policy so accommodative?

“In the near term we think the focus will remain on supporting growth, but there is an increasing chance that policy will need to be tightened sooner and more forcefully to deal with potential problems caused by very easy liquidity. The accelerator is clearly working well, but at some stage the brake will need to be used.”

WENSHENG PENG AND JIAN CHANG, ECONOMISTS, BARCLAYS CAPITAL,

HONG KONG:

“The latest data releases point to moderate upside risk to our projection of 7.8 percent growth for 2009 as a whole.

“Strong GDP growth, coupled with the extraordinary pace of credit expansion, has increased the risk of policy tightening, in our view. The central bank has already started to gently tighten interbank liquidity through open market operations, and money market interest rates were guided higher over the past few weeks.

“More substantive tightening -- in the form of quantitative measures, such as hikes in the reserve requirement ratio -- is likely if economic data are in line with our expectations in the next few months. Renewed window guidance on bank lending is also possible if bank credit growth continue to surprise on the strong side.”

YU SONG AND HELEN QIAO, GOLDMAN SACHS, HONG KONG:

“We see clear upside risks to our current GDP growth forecast of 8.3 percent for 2009.

“If we simply keep the previous q-o-q assumptions for 3Q and 4Q, the implied annual GDP growth will reach 8.9 percent, comparable to its level in 2008.

“While the central bank has initiated some liquidity absorption in recent weeks, which caused concerns in the market about an imminent and significant tightening, these adjustments need to be viewed in the context of the strong acceleration in money and credit growth in June from an already very high level.

“The bottom line is, despite the significant improvement in activity growth, the Chinese government is likely to maintain its growth-supportive policy bias to minimize risks of a double dip.

“As a result, we do not see a change in overall policy direction until late 4Q when the government will likely become more comfortable with the sustainability of the recovery while also more anxious about risks of inflation and asset price inflation.”

ISAAC MENG, BNP PARIBAS, BEIJING:

“Overall, the Q2 data indicate that economic recovery is strengthening, led by surging domestic investment and resilient household demand. Growth is on path to reach our revised 8.2 percent GDP for 2009.

“The surging liquidity and rebound in commodities prices imply a return to benign inflation by 2010.

“The unprecedented liquidity implies asset bubble and banking risks. With stronger growth recovery confirmed, the government is taking proactive measures to tighten liquidity and slow down asset speculation. Despite continuing to reiterate that policy is ‘appropriately loose’, credit-liquidity tightening is already underway. Some forms of credit quota or rationing seem inevitable to achieve the ‘appropriate pace’.

Reporting by Alan Wheatley; Editing by Kim Coghill

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