China's growth just won't slow

China will announce its economic growth figure for the first quarter of the year on Thursday. Expect a humdinger.

Despite official efforts to rein in and rebalance the mainland's economy, it is highly likely that the pace of growth accelerated rather than slowed during the first three months of 2007, rising to about 11 per cent year on year from 10.4 per cent in the final quarter of last year.

We can be pretty confident China's rate of growth has picked up simply because the main components which contribute to the mainland's economic growth all continued to expand robustly over the first quarter.

Most notably China's exports grew by 27.9 per cent year on year in the first three months of the year, faster even than the 26.5 per cent growth rate clocked up in the first quarter of last year.

At the same time import growth slowed down, falling to 18.2 per cent compared with 24.9 per cent for the previous year.

As a result, China's trade surplus ballooned, more than doubling in size to US$46.5 billion for the first quarter, up from US$23.1 billion in the first three months of last year.

That figure alone would make a robust economic growth rate inevitable. But it is not only China's net exports that have been expanding quickly. Growth in other important constituents of the gross domestic product, including investment and private consumption, also appears to have been strong.

In January and February urban fixed asset investment rose 23.4 per cent year on year. Retail sales were up 14.7 per cent.

Other figures also indicate an economy running at full throttle. Industrial production grew at a year-on-year rate of 18.5 per cent in January and February, while Chinese banks made new loans worth an impressive 1.42 trillion yuan over the first quarter, up 13 per cent from last year.

Meanwhile, earnings at industrial companies are up by 40 per cent or more year on year, helping to drive a stock market rally which has seen A-share prices more than triple since the beginning of last year.

To many observers all this looks like an economy in serious danger of overheating. Clearly, officials at the People's Bank of China are concerned. Over the last year they have raised interest rates three times and increased the amount of money banks are required to set aside as reserves from 7.5 per cent of deposits to 10.5 per cent, removing more than one trillion yuan from the banking system.

These measures appear to have had little impact on the ground, however. And although another interest rate rise is widely expected over the coming weeks, and further reserve ratio increases are likely, it is doubtful whether they will have any more success than the central bank's previous attempts to tap on the economic brakes.

Other government efforts to rein in growth by imposing administrative restrictions have been partially effective at slowing investment in specific sectors and have clearly taken some of the steam out of Shanghai's property bubble.

But as Thursday's figures are likely to show, the impact on overall investment or China's economic growth rate has so far been negligible.