New tightening moves tipped as economic growth accelerates

PUBLISHED : Wednesday, 19 July, 2006, 12:00am
UPDATED : Wednesday, 19 July, 2006, 12:00am

Analysts predict action despite government wait-and-see line

New tightening measures are expected by analysts despite government suggestions that it may not be ready to take stronger action to rein in the rapidly expanding economy.

Revealing a robust 10.9 per cent first-half growth rate yesterday, National Bureau of Statistics spokesman Zheng Jingping said the government needed time to assess the impact of tightening measures.

But economists have expressed doubt about recent government forecasts - including one from the National Development and Reform Commission - that the pace of growth will ease in the second half of the year.

'Given the momentum from the much faster than expected economic growth in the first half, we believe the economy will power ahead into the second half and growth will surpass 11 per cent for the whole year,' said Gao Shanwen , chief economist at Everbright Securities in Shanghai.

The world's fastest growing major economy took analysts by surprise with its unrelenting vigour, expanding at 11.3 per cent in the second quarter - the fastest pace of expansion in more than a decade.

'Driven by excess liquidity and local governments' desire for economic expansion, the Chinese economy is decidedly overheated and increasingly imbalanced,' said Ha Jiming, chief economist with the China International Capital Corporation.

Mr Gao said the government could launch a new round of tightening measures in the third quarter, using all measures, except an appreciation of the yuan.

'There is a great difference between what the government should do and what it will do in the near future. We believe that what the government should do is the further appreciation of yuan. But we do not think they will do it,' Mr Gao said.

'And what the government will do in the immediate future will be measures such as increases of interest rates and reserve requirements for banks and other administrative measures to curb fixed-asset investment and speculation in real estate.'

Mr Ha said he also expected an interest rate increase of 27 basis points in each of the third and fourth quarters, a 'somewhat accelerated exchange rate appreciation in the remainder of the year to 7.7 yuan against the US dollar' by the end of the year and a tightening of prudential regulations for credit growth.

He said an expected moderation in global economic growth and the recent deceleration in planned investment for new projects would deliver a modest slowdown, but the mainland economy would still grow strongly in the second half of this year and into 2007.

Stephen Green, senior economist with Standard Chartered Bank, who also forecast a 27 basis point interest rate increase in the third quarter, said taking money directly off the banks' balance sheets through increases in reserve requirement ratios and using guidance to control lending were more effective means of slowing lending growth in the short term.

However, Jonathan Anderson, an economist with UBS, said detailed economic indicators suggested the government could afford to wait.

'Credit, investment, expenditure and physical activity data all show a fast-growing economy, but not as overheated as three years ago,' Mr Anderson said.

'The strong GDP [growth] could well cause the authorities to take additional tightening measures but, on balance, we still believe the government will wait for the policies already in place to take effect.'

A leading government economist said yesterday that fast economic growth was not a concern, although he conceded that the growth in capital spending was on the fast side.

Xia Bin , head of the Financial Research Institute at the State Council's Development and Research Centre, said investment in fixed assets was excessive and the supply of credit was also too large.

However, Professor Xia said the latest data also suggested an improvement in investment structure and industry profits.

'Rapid growth does not mean anything bad without careful analysis as performance of industrial enterprises and investment structure have all seen improvement in the first half,' he said.

Investment and trade remained the growth drivers, despite government attempts to develop domestic consumption as a rival economic force.

Investment in real estate surged 24.2 per cent to 769.5 billion yuan in the first half of the year.