BEIJING (Reuters) - China’s annual economic growth quickened in the first quarter to 11.9 percent, the fastest pace since 2007, benefiting from a low base of comparison last year and the momentum imparted by massive bank-financed stimulus.
Inflation remained subdued, giving policymakers the luxury of waiting a while, should they choose, before tightening policy further to head off overheating. Consumer prices rose 2.4 percent in the year to March, less than expected.
-- Economists had forecast GDP growth of 11.5 percent and March CPI inflation of 2.6 percent.
PAUL CAVEY, HEAD OF CHINA ECONOMICS AT MACQUARIE IN HONG KONG:
“The GDP number is obviously very high, but I don’t think there’s actually anything in the numbers today that will surprise anybody. The debate about interest rates and the exchange rate are kind of separate from these figures. Interest rates will depend a bit more on the property market and the renminbi will depend on the U.S. and international pressure. But I think these numbers, they are obviously important but I don’t think they are going to have a big effect on policy.”
BRIAN JACKSON, ECONOMIST WITH ROYAL BANK OF CANADA IN HONG KONG:
”We expect consumer inflation will continue to trend higher in coming months, with PPI data indicating strong price pressures are in the pipeline.
“Although the fall in CPI inflation in March may persuade policymakers to stay on hold a little longer, the case for policy tightening remains intact given the risks of China’s economy overheating, and we continue to expect moves in this direction in the next few months.”
STEPHEN GREEN, ECONOMIST WITH STANDARD CHARTERED IN SHANGHAI, IN A NOTE TO CLIENTS:
“In short, growth is strong, but there are signs of overheating. With stimulus already partly removed, the key is whether the authorities can steer the economy onto a more sustainable growth path, or whether generalized inflation and/or an asset bubble will break out in H2 and then trigger a bigger policy-induced slowdown for China in 2011.”
YAO JIAN, MINISTRY OF COMMERCE SPOKESMAN, AT A NEWS CONFERENCE:
Yao said external demand has not shown a clear rebound, leading to a slow recovery in China’s exports.
He added that China’s trade surplus would further narrow for the full year.
TOM ORLIK, ANALYST WITH STONE & MCCARTHY RESEARCH ASSOCIATES:
”The CPI might be within the government’s comfort zone, but with the economy now growing at considerably faster than potential, it is not hard to find signs of inflationary pressure elsewhere.
“On interest rates, the government is faced with an unpalatable choice: raise rates and dampen the ardor of investors in the real estate sector, or leave rates on hold and allow the property bubble to expand further, and risk inflationary expectations taking hold.”
On the yuan:
”The chances of an immediate move cannot be ruled out. But in our view, the most likely time for a compromise solution that satisfies both domestic and international opinion is the end of the second quarter.
“A return to appreciation, and a first move on the interest rate, might then form a complimentary set of policy changes at the end of the second quarter.”
”The activity data is as expected, but the price data was considerably softer than expected. For those who were looking for an imminent interest rate adjustment, this firmly skews the next policy move toward being a yuan revaluation.
”This does not suggest an economy that is overheating. In line with that, it brings the yuan debate back to front and center as likely to be the next policy move.
”We have always maintained Q2 for a revaluation. It could happen any time.
”It’s imminent that you’ll see a yuan revaluation and a widening of the yuan’s trading band. There clearly has been a thawing of relations between Washington and Beijing at the very highest levels.
”So particularly in the lead-up to there G20 meeting you are likely to see China realizing that yuan stability and China’s stimulus package made an enormous contribution to global stability in the aftermath of the crisis, but now that China’s economy is growing by 12 percent it’s time for China to share some of that growth with the rest of the world via appreciating its exchange rate.
“And I think you will see China making that important gesture in the lead-up to one of these multilateral forums.”
”China may not raise interest rates at all this year.
”If there is an interest rate rise, the most possible timing is June or July.
”I personally think April is a good time to raise interest rates, as growth is fast and inflation is still low.
”However, a rate hike will increase upward pressure on the yuan.
”China will most likely start a gradual rise of the yuan in May or June.
”China’s annual consumer inflation will exceed 3 percent in May through July.
“Annual economic growth will gradually slow down to around 9.5 percent in the second quarter and even lower in the third and fourth quarter.”
YU SONG AND HELEN QIAO WITH GOLDMAN SACHS IN HONG KONG, IN A NOTE TO CLIENTS:
”The strong GDP growth was not because of a low base as sequential GDP growth is also high at 11.3 percent qoq s.a. ann.
“We think in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating. However, as CPI inflation remains low for now and policymakers remain very cautious on the external demand outlook we are likely to see more decisive tightening measures after CPI inflation rises to a relatively high level of say 3 percent-4 percent.”
BEN SIMPFENDORFER, STRATEGIST AT ROYAL BANK OF SCOTLAND IN HONG KONG:
“Growth is running too hot; it requires policy tightening. The fact that CPI was a lower 2.4 percent, that means the PBOC may be reluctant to hike (interest rates) until June when CPI will hit that 3 percent threshold. So in short, it’s a dangerous mix of numbers.”
”Food prices are the major reason for lower-than-expected CPI. However, we should be cautious about a possible rebound in food prices, especially pork. CPI is expected to stand between 3 and 4 percent through May to October.
”The set of figures basically eliminates the possibility of an interest rate increase in April, but we reckon there is a big chance of a rate change in May or June.
“Our judgment is that Beijing will adjust the yuan exchange rate in the first half as well. Both China and the United States will have to make certain compromises on this issue. We expect the move to come before the G20 meetings in June.”
For details, see the website of the National Bureau of Statistics at www.nbs.gov.cn.
-- Benchmark one-year dollar/yuan offshore forwards were bid at 6.6100 at 0248 GMT, compared with 6.6090 before the data was announced, after briefly touching a three-month low.
-- The Shanghai stock market was down 0.03 percent, compared with a fall of 0.27 percent before the data came out.
-- The government noted in a statement on the eve of the GDP release that the economy is growing fast but largely thanks to policy stimulus and a low base effect last year.
-- The government’s 4 trillion yuan stimulus package, complemented by record bank lending of 9.6 trillion yuan, fueled 8.7 percent growth in 2009, by far the strongest performance of any major economy.
-- The authorities are now cautiously unwinding some of the stimulus. The central bank has raised reserve requirements twice this year, stepped up open market operations to drain liquidity and reduced its 2010 loan quota to 7.5 trillion yuan.
-- But unlike a clutch of Asian neighbors, including India and Malaysia, it has kept its benchmark interest rates unchanged. And unlike Singapore this week, it has not tightened financial conditions by pushing up its exchange rate.
Reporting by Aileen Wang, Zhou Xin, Michael Wei and Melanie Lee; Editing by Alan Wheatley and Jason Subler