China's Economy Expands More-Than-Forecast 9.7% as Inflation Accelerates

China’s economy grew a more-than- estimated 9.7 percent in the first quarter and inflation accelerated in March to the fastest pace since 2008, adding pressure for more monetary tightening.

Consumer prices rose 5.4 percent from a year earlier, the statistics bureau said at a briefing in Beijing today. The median forecasts in Bloomberg News surveys of economists were for growth of 9.4 percent and inflation of 5.2 percent.

China may boost reserve requirements for lenders for the fourth time this year to drain cash from the fastest-growing major economy, Credit Agricole CIB and Australia & New Zealand Banking Group said. Today’s data may also add pressure for interest-rate increases and faster appreciation in the yuan after food and commodity costs drove inflation higher than the government’s 2011 target for a third month.

“There is little economic moderation despite aggressive monetary tightening,” said Liu Li-Gang, an ANZ economist in Hong Kong who formerly worked for the World Bank. “Inflation remains a top risk.”

The reserve ratio is 20 percent for the biggest banks and the one-year benchmark for borrowing costs is 6.31 percent after four rate increases since mid-October. Growth was 9.8 percent in the fourth quarter of last year.

The Shanghai Composite Index closed 0.3 percent higher. The yuan was little changed at 6.5295 per dollar as of 3:27 p.m. local time.

Asian Inflation

Inflation pressures across Asia were highlighted by India today reporting a larger-than-forecast 8.98 percent jump in the wholesale-price index in March from a year earlier. The yield on the 8.08 percent bond due in August 2022 rose 4 basis points to 8.24 percent, the highest level since Feb. 8, as of the 5 p.m. close in Mumbai.

Today’s data release in China confirmed numbers circulating yesterday, including in a Phoenix Television news report. The statistics bureau condemned any leaks and said offenders will be punished.

Fixed-asset investment excluding rural households rose 25 percent in the first quarter from a year earlier and industrial production climbed 15 percent in March, the statistics bureau said. Retail sales grew an annual 17 percent in March and producer prices jumped 7.3 percent, today’s report showed.

Officials must gauge the “lagging effects” of tightening monetary policy to avoid future harm to the economy, Premier Wen Jiabao said this week. China International Capital Corp., China’s biggest investment bank, cautioned that corporate earnings growth may slow as the economy cools in coming months.

“Clear inflationary pressure” may affect consumption in China, Pierre Bouchut, the chief financial officer for Carrefour SA, the world’s second-largest retailer, told analysts yesterday.

Commodity Costs

Inflation was largely driven by food costs, which rose 12 percent in March from a year earlier. The leaders of Brazil, Russia, India, China and South Africa said at a meeting in Sanya, China, yesterday that volatile commodity prices pose a threat to the global economy, calling for more regulation.

Non-food inflation accelerated to 2.7 percent, while a jump in China’s foreign-exchange reserves to a world record $3 trillion, reported yesterday, highlighted the additional risk that inflows of capital may stoke inflation.

Taming prices is the government’s top and “urgent” priority, China’s cabinet said after meeting in Beijing this week to review the performance of the world’s second-biggest economy. Officials aim to hold inflation at 4 percent for the full year. Tightening measures and comparisons with higher year- earlier bases may slow price gains in the second half of the year, according to HSBC Holdings Plc.

Currency Flexibility

The economy grew 2.1 percent from the previous quarter, seasonally adjusted, the statistics bureau said today, releasing that number for the first time. That compared with a 2.4 percent gain in the fourth quarter. Consumer prices slid 0.2 percent in March from February.

The central bank may increase the yuan’s flexibility to “eliminate monetary conditions that fuel inflation,” Wen said this week. The Chinese currency is described by the U.S. as undervalued and a factor in global economic imbalances.

“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation,” billionaire investor George Soros, chairman of Soros Fund Management LLC, said at a conference in Bretton Woods, New Hampshire, on April 10. He described inflation as “somewhat out of control.”

Property Prices

Investors have signaled confidence that the fastest-growing major economy will achieve a so-called soft landing, with inflation tamed and the expansion maintained. Shanghai’s benchmark stock index advanced 8 percent in the three months through today, compared with a decline of 2 percent in the MSCI Asia Pacific Index.

China’s cabinet said this week that rising property prices in many cities and increasing inflation expectations are key concerns as the nation wrestles with the aftermath of a record 17.5 trillion yuan ($2.7 trillion) of lending over 2009 and 2010.

Fitch Ratings cut the outlook for China’s local-currency sovereign debt rating to “negative” from “stable” this week, citing a likely deterioration in bank asset quality. Moody’s Investors Service lowered its outlook for the property sector to “negative” from “stable” on concern residential sales could decline by as much as 30 percent as local governments enforce housing curbs.

In contrast, Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, said its bad-loan ratio is dropping and ruled out a worsening of asset quality from property and local government lending.

“If the economy is growing, the financial sector is bound to do well,” Chairman Jiang Jianqing said in a Bloomberg Television interview in Sanya in southern China’s Hainan province yesterday. “The challenges we face in areas such as real estate and local government financing vehicles will all be solved. Chinese banks’ asset quality won’t deteriorate.”

--Victoria Ruan, Zheng Lifei, Zhang Dingmin. With assistance from Jay Wang in Singapore. Editors: Paul Panckhurst, Sunil Jagtiani.

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at +86-10-6649-7570 or vruan1@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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