China's healthier growth mix reduces the danger of a crash
Fear of economic overheating is likely to be met by largely symbolic rate rises, writes Tom Holland
Powerful economic growth in the first quarter makes it more than likely that the People's Bank of China will resort to interest rate rises later in the year to dampen the risk of overheating.
However, any rate increases will be small and largely symbolic, a growing number of private sector economists believe, arguing recent data indicates that China is shifting to a healthier, more sustainable growth trajectory.
The headline figures released yesterday show the Chinese economic express continued to steam ahead in the first three months of the year. The National Bureau of Statistics said gross domestic product expanded 9.5 per cent, compared with the first quarter of last year, well above most predictions.
The strength of that performance troubles some analysts. They worry that China's growth rate may be accelerating again following Beijing's attempts last year to avert a crash by restricting investment in the economy's most over-inflated sectors.
Reading between the lines of yesterday's data, however, some China watchers are optimistic. 'We are seeing more evidence of the beginning of a slow slowdown,' says Stephen Green, an economist at Standard Chartered.
Mr Green notes that although China's exports soared almost 35 per cent during the quarter, import growth slowed to a relatively modest 12 per cent - less than half the rate in the last three months of last year. With much of China's export industry built on processing imports, he believes this slowdown presages a deceleration in export growth, and hence overall economic growth, later in the year.
Other economists are encouraged that Chinese inflation is easing. Despite stellar economic growth, consumer prices rose just 2.8 per cent in the first quarter. 'The potential for non-inflationary growth in China is quite high,' says Jun Ma, Greater China economist for Deutsche Bank. With price increases moderating, there is little danger of the punitive interest rate increases some analysts fear, Mr Ma argues.
A clutch of other numbers points to the same conclusion, but the big concern remains investment growth. Although well down from its early peak last year, investment in fixed assets still rose 23 per cent in the first quarter. That is fast enough to stoke fears of a coming crash, especially in China's frothy property markets.
But even here, there are encouraging signs. Julian Jessop, chief international economist at independent research house Capital Economics, points out that the mix of investments has shifted in the past year. Although real estate investment is still high, money is pouring into more productive sectors such as agriculture, power and transport. Investment in food and coal production will reduce China's dependence on imported commodities, boosting net exports, argues Mr Green, while heavier investment in the railways - up by 430 per cent compared with last year - will relieve some of the logistics bottlenecks hampering exporters.
These are positive signals, but with growth running well above Beijing's target for the year of 8 per cent, the authorities are likely to step in and cool things off at the first hint of trouble.
If railways and power generators fail to keep pace with accelerating demand, or if inflation moves towards 5 per cent, the government should act fast, says Dong Tao, chief regional economist for Credit Suisse First Boston.
Mr Tao says the government should consider tough restrictions on investment in overheating sectors of the economy, together with steep interest rate rises. The alternative, he warns, is that rising inflation and overinvestment will crowd out healthy sectors of the economy as production costs skyrocket.
Other analysts agree that more administrative measures to slow investment are in the cards later this year but believe that more modest interest rate increases of about 0.5 per cent will be sufficient to rein in the excesses and maintain a steady, though high, growth rate.
Mr Jessop says that although the first quarter growth rate of 9.5 per cent surprised many forecasters, it was in line with China's average growth since economic reforms began in the late 1970s.
'Given the enormous economic potential of China, I see no reason why growth rates of 8 or 9 per cent shouldn't be sustainable well into the future,' he says.