Soaring GDP, prices send stocks diving

PUBLISHED : Friday, 26 October, 2007, 12:00am
UPDATED : Friday, 26 October, 2007, 12:00am

Mainland's 11.5 per cent growth sparks fears of more tightening

The mainland economy grew at a sizzling 11.5 per cent last quarter, the government said yesterday - sparking a major selldown of stocks as investors braced for higher interest rates and other tightening measures and digested a warning from investment guru Warren Buffett.

The expansion, slightly below the 11.9 per cent recorded in the second quarter, prompted warnings from policymakers concerned about a boom-to-bust scenario in the world's fastest-growing major economy. Consumer prices last month rose at the second-fastest pace in more than a decade.

'Despite the moderation in growth and inflation, they remain above the comfort zone for policymakers,' said Hong Liang, chief economist with Goldman Sachs.

The People's Bank of China has increased borrowing costs five times this year in an attempt to put the brakes on growth. Jittery investors, fearful of a sixth interest rate increase sooner rather than later, sent the key Shanghai Composite Index down 4.8 per cent to 5,562.39, its biggest loss in four months.

Mr Buffett, chairman of Berkshire Hathaway, warned on Tuesday that investors should be cautious about Chinese equities because the market was 'too hot' - a sign the world's most famous investor is cooling on a market that has surged 107 per cent this year.

National Bureau of Statistics spokesman Li Xiaochao said the government's tightening steps had achieved some success, but acknowledged problems remain.

The mainland economy is expanding at a pace way above the official target of 8 per cent for the whole year, and is on track to post double-digit growth for the fifth year in a row.

'The institutional, systematic and structural problems in economic performance are still outstanding, including rapid economic growth, price rises and high pressure on energy consumption,' Mr Li said.

'We expect the economy's growth pace to remain largely solid,' said Frank Gong, chief China economist with JPMorgan, who predicts another 27-basis-point rise in interest rates and more rapid appreciation of the yuan soon.

The currency yesterday rose to its highest level against the greenback - 7.4834 per dollar - since it was allowed to float within tightly managed bands in July 2005.

Premier Wen Jiabao reiterated on Tuesday that the government would move to rein in inflation, excessive growth in credit and capital investment.

Ha Jiming, chief economist with China International Capital Corp, said the central bank could raise interest rates by 54 basis points before the end of the year.

The consumer price index was up 6.2 per cent year on year in September, a slight drop from the 6.5 per cent gain in August but still the second-highest in more than 10 years and more than double the government's full-year target of 3 per cent. Consumer prices rose 1.5 per cent last year.

Mr Li forecast inflation would slow, but said policies aimed at preventing economic overheating still needed some time to show their full effect. Changes in the global economic situation might work against Beijing's efforts, he said.

A major driver of the growth has been a construction boom, with fixed-asset investment up 25.7 per cent so far this year. Retail sales, a measure of personal consumption, were up 15.9 per cent year on year.