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China Growth Estimates Lowered as Monetary Tightening Bites

Chinese Premier Wen Jiabao
Wen Jiabao, China's premier, said in March that tackling inflation is China’s top priority. Photographer: Tomohiro Ohsumi/Bloomberg

May 24 (Bloomberg) -- Goldman Sachs Group Inc. joined banks lowering their forecasts for China’s growth as Premier Wen Jiabao’s campaign to rein in inflation restrains the world’s fastest-growing major economy.

China’s gross domestic product will gain 9.4 percent in 2011, less than a previous call of 10 percent, Goldman analysts Yu Song and Helen Qiao wrote in a note to clients today. Credit Suisse Group AG, JPMorgan Chase & Co., ING Groep NV and Daiwa Securities Group also pared their estimates this month.

The changes underscore increasing concern among investors about the impact on corporate earnings from Wen’s efforts to curb credit, with the benchmark stock index today falling to its lowest level since January. Evidence of the slowdown may prompt policy makers to ease off on further monetary tightening, the Goldman analysts said.

“We see little room for further rate hikes,” Song and Qiao said in today’s report. “Even if the State Council decides to keep the tightening bias in monetary policy, we see stronger opposing forces for rate hikes since such measures will have a universal impact across sectors.”

The benchmark Shanghai Composite Index was down 0.7 percent at 1.11 p.m. in Shanghai after tumbling 2.9 percent yesterday in the wake of a private report indicating the smallest manufacturing gain in 10 months.

Higher Inflation

A preliminary purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics dropped to 51.1 in May from a final reading of 51.8 in April, the bank said yesterday.

Goldman economists said they expect one 25 basis-point increase in borrowing costs and savings rates in the next two months, with “little room” for further adjustments. In contrast, Joseph Yam, former head of the Hong Kong Monetary Authority, said today China will continue to raise interest rates to control inflation and that he “can’t rule out” the possibility that deposit rates will be higher than gains in consumer prices by the end of the year.

China’s benchmark one-year deposit rate is 3.25 percent while inflation in April was 5.3 percent. The rate has lagged behind consumer-price gains for more than a year.

Goldman Forecast

Goldman’s economists today raised their forecast for China’s full-year inflation to 4.7 percent from 4.3 percent. Consumer-price gains will likely peak in June at an annual 5.6 percent, partly driven by the recent surge in pork prices, and won’t ease to below 5 percent until August, Song and Qiao said.

The cost of the meat climbed 44 percent from a year earlier on May 14 due to tighter supplies, the official Xinhua news agency reported on May 16.

“The overall inflation problem seems more entrenched now than last year,” the economists wrote. As costs including energy are “allowed to rise when inflation falls to less politically-sensitive levels, and as food price inflation is not falling as we had hoped, the decline in headline inflation is likely to be more gradual,” they said.

Inflation accelerated to a 32-month high of 5.4 percent in March and has exceeded the government’s 2011 target of 4 percent every month this year.

China raised interest rates four times since mid-October and boosted banks’ reserve requirement ratio eight times since November, most recently on May 12.

Lowered Estimates

ING cut its estimate for China’s full-year growth to 9.8 percent from 10.2 percent in a research note dated May 12 and reduced its second-quarter forecast to an annual pace of 9.6 percent, from 10.3 percent. The bank also said its call for a 25 basis-point increase in interest rates by the end of next month is subject to “downside revision.”

Credit Suisse adjusted its 2011 expansion estimate to 8.8 percent from 9.1 percent on May 1 and Daiwa on May 11 said it now sees GDP growth of 9.2 percent this year rather than 9.6 percent. JPMorgan changed its estimate to 9.4 percent from 9.5 percent on May 20.

Government researcher Ba Shusong said he’s “concerned about a policy over-adjustment” as “China’s economy faces a risk of an excessive downturn” if the central bank’s tightening measures last too long. His comments were published in today’s Economic Information Daily. He expects China’s tightening steps will continue into the third quarter while consumer inflation may peak in the middle of this year.

Inflation a Priority

Premier Wen said in March that tackling inflation is China’s top priority. Last month, he said the government must gauge the “lagging effects” of tightening monetary policy to avoid future harm to the economy.

The People’s Bank of China is focused on controlling prices, Governor Zhou Xiaochuan wrote in the bank’s annual report posted on its website on May 17. He didn’t mention threats to growth, indicating he is more concerned about inflation than any risk of a slowdown.

While the central bank has yet to announce a shift in its policy tone, government economists including Ba and Yu Yongding have publicly called for policy makers to be more aware of the risks of excessive tightening.

Yu, a former central bank adviser, said in an interview in Beijing on May 5 that the nation’s economic growth can exceed 9 percent this year, although it faces uncertainties including the risk of over-tightening, which may lead to a sharper downturn in economic growth.

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at

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