China Growth Quickens, Fueling Rate-Rise Speculation

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A gold figurine of Mao Zedong, former leader of China, is displayed at a store in Beijing.

China’s economic growth accelerated to 9.8 percent as industrial production and retail sales picked up, sending stocks lower from Asia to Europe on concern Chinese policy makers will raise interest rates and stem the expansion.

The fourth-quarter expansion exceeded the 9.4 percent median estimate in a Bloomberg News survey of 22 economists and the 9.6 percent annual gain in the previous three months, a statistics bureau report showed. Consumer-price inflation eased to 4.6 percent in December. Citigroup Inc. and Credit Suisse Group AG say inflation may peak at as much as 6 percent in the first half.

“If the economy keeps growing at the current pace, inflation will remain alarming,” said Liu Li-Gang, a Hong Kong- based economist at Australia and New Zealand Banking Group Ltd. Beside raising lenders’ reserve requirements, the central bank should boost benchmark rates, he said.

China may also allow more gains in the yuan to contain consumer prices and ease trade tensions, a topic on the agenda of President Hu Jintao’s meetings in the U.S. this week. In Tokyo, Japanese government minister Kaoru Yosano said his country was probably overtaken as the second-largest economy last year, after today’s report showed China’s gross domestic product totaled 39.8 trillion yuan ($6.04 trillion).

The Shanghai Composite Index tumbled 2.9 percent to close at a four-month low. The MSCI Asia Pacific index lost 1.3 percent. On the Frankfurt Stock Exchange, the preferred shares of Volkswagen AG, the largest European carmaker in China, slid 5 percent as of 11 a.m. local time.

Yuan Trading

Non-deliverable yuan forwards traded at 6.4780, indicating that the currency may appreciate about 1.7 percent against the dollar in the next 12 months.

China’s economy expanded 10.3 percent in 2010, the fastest pace in three years, the statistics bureau report showed. That compared with growth of 9.2 percent in 2009. The nation’s standing as the No. 2 economy may be confirmed on Feb. 14 when Japan reports gross domestic product for the fourth quarter.

Bank of America-Merrill Lynch estimated today that, using average full-year exchange rates, China’s GDP was about $380 billion bigger in 2010 than Japan’s.

December’s inflation compared with November’s 5.1 percent annual pace, which was the fastest in more than two years. The rate slowed largely because of a higher year-earlier base for comparison and may “spike” in January ahead of a Chinese New Year holiday, Merrill economist Lu Ting said.

Commodity Costs

For 2010 as a whole, consumer prices rose 3.3 percent, breaching a government target of 3 percent.

A tighter monetary policy, abundant grain supplies and industrial overcapacity will help to restrain price increases, statistics bureau head Ma Jiantang told reporters at a briefing in Beijing. At the same time, China can’t be “relaxed” about inflation as labor and commodity costs rise, he said.

Urban fixed-asset investment rose 24.5 percent in 2010 from a year earlier. Retail sales grew at an annual 19.1 percent in December, partly boosted by inflation, and industrial production rose 13.5 percent, the statistics bureau said. Producer prices jumped 5.9 percent.

In nominal terms, the nation’s gross domestic product is more than 100 times bigger than in 1978, when Communist Party leader Deng Xiaoping began rolling out free-market policies. While China outstripped Germany in 2007 and the U.K. and France in 2005, the economy remains less than half as big as that of the U.S.

‘Abnormal’ Lending

Premier Wen Jiabao pledged this week to prevent “abnormal” loan growth amid concern that resurgent lending may add to excess money in the financial system, fueling asset bubbles and inflation.

China’s foreign-exchange reserves jumped by a record $199 billion in the fourth quarter and new loans breached the government’s target for 2010. Companies from Baoshan Iron & Steel Co. to Starbucks Corp. have raised prices.

Policy makers’ commitment to taming inflation means they risk “overshooting” and causing a slowdown that hampers the global recovery, Allen Sinai, president of Decision Economics in New York, said in an interview in Tokyo this week.

The central bank will increase the key one-year lending rate to 6.81 percent from 5.81 percent this year and let the yuan gain about 6 percent against the dollar, Nomura Holdings Inc. estimated this week.

Yuan Policy

The Chinese currency traded at 6.5884 per dollar, after President Barack Obama said it remains undervalued.

“There has been movement, but it has not been fast enough,” Obama said yesterday.

Chinese Commerce Minister Chen Deming said U.S. export controls and China’s role in global manufacturing helped to explain the nations’ trade imbalance.

China aims to hold inflation at 4 percent for the full year, state television reported last month, citing the National Development and Reform Commission, the economic planning agency.

Inflation of even that level is “serious” in China, according to Ma Jun, Deutsche Bank AG’s chief China economist. “People are used to low inflation and high inflation will easily cause social discontent,” he said, citing a 1.6 percent average annual rate for the 10 years through 2009.

The central bank has raised reserve ratios for the largest banks to 19 percent, excluding any extra requirements for individual lenders. Still, local-currency lending has already exceeded 1 trillion yuan in the year to date, the 21st Century Business Herald reported, citing an unidentified person familiar with the matter. Lending was 481 billion yuan in December.

The Shanghai Composite Index rose by the most in five weeks yesterday after speculation that the December inflation number had leaked and was 4.6 percent, the number announced today.

--Li Yanping, Zheng Lifei. With assistance from Jay Wang, Sophie Leung and Aki Ito. Editors: Paul Panckhurst, Ken McCallum.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net Zheng Lifei in Beijing at +86-10-6649-7560 or Lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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