HONG KONG - China's economic growth
survived almost unscathed the worst winter in half
a century and the impact of subprime crisis in the
United States. With inflation continuing to rise
in the first quarter, the country's policymakers
showed immediate determination to continue a tight
monetary policy.
The economy grew 10.6% in
the first three months this year, down from 11.7%
in the last quarter of 2007, the National Bureau
of Statistics said on Wednesday.
The
consumer price index (CPI), the key gauge of
inflation, for the first quarter gained 8% from a
year earlier, compared with a 2.7% rate in the
same period in 2007.
The CPI in March rose
8.3% year-on-year, well above the
government's full-year inflation
target of 4.8%, which National Bureau of
Statistics (NBS) spokesman Li Xiaochao, releasing
the statistics at a press conference in Beijing,
admitted would be difficult, if not impossible, to
meet. Even so, the March figure was down from an
11-year high of 8.7% in February.
Shortly
after the release of the first-quarter economic
statistics, the People's Bank of China (PBoC), the
country's central bank, said it would raise the
reserve requirement ratio for commercial banks by
50 basis points to a record 16%, effective from
April 25.
"The rise, a further
materialization of tight monetary policy, is aimed
at strengthening liquidity management in the
banking system and steering bank credit to grow
reasonably," the PBoC said in a statement.
The latest move follows increases in the
reserve requirement on January 25 and again on
March 25, on top of 10 such moves in 2007. It also
raised interest rates six times last year.
"An increase in the reserve ratio by a
small margin will help to stabilize inflation
expectations, while maintaining stable economic
growth," Peng Xingyun, a finance researcher at the
Chinese Academy of Social Sciences, told Xinhua
news agency.
Experts said that raising the
reserve requirement was an easier option for the
PBoC than an interest rate increase, as economic
growth was slowing.
"China has maintained
steady, rapid growth so far this year, despite the
worst winter here in half a century and the
spreading global credit crisis," Li said.
Curbing inflation remained the
government's top concern and its policy priority,
he said, and the risk of inflation spreading from
upstream sectors such as raw material, labor and
commodities to other areas of the economy was
rising.
Food prices soared 21% in the
first quarter from a year earlier, driving the CPI
up by 6.8 percentage points, according to the NBS.
House prices and rents went up 6.6% on average,
driving the inflation gauge by one percentage
point. Retail prices and raw material prices were
up 7.4% and 9.8% respectively.
The
producer price index - reflecting the production
costs of upstream sectors - jumped by 6.9% year on
year in the first quarter, an increase of 4.4
percentage points compared with a year earlier.
The index gained 8% in March from a year earlier,
compared with a 6.6% year-on-year gain in
February, a three-year high.
Li said the
bureau is keeping a close eye on when, and to what
extent, the rising cost of producers would be
passed on to consumers. If Beijing is to achieve
its target of keeping inflation below 4.8% this
year, he said, it must keep the CPI under 4.2% for
the rest of the year, adding that this was "not
easy".
"Now, we not only have to prevent a
sharp downturn of the economy, but also a rebound
in investment," Li said. Fixed asset investment
jumped 24.6% in the first quarter from a year
earlier, to 2.18 trillion yuan (US$312 billion).
Regarding a possible downturn and the
knock-on effect of the financial crisis in the US,
where a recession is threatening amid tumbling
house prices, Li said: "We are far from seeing the
full impact of the subprime [mortgage] crisis.
External demand is likely to shrink further."
China's exports grew 21.4% in the first
quarter from a year earlier, down 6.4 percentage
points from the same period last year. The export
slowdown came as the US, which accounts for 23% of
China's exports, cut orders for Chinese products.
Economists and analysts said the
higher-than-expected economic growth and high
inflation present a difficult task for the
government to achieve its full-year inflation
target.
Chen Xingdong, chief economist of
BNP Paribas Peregrine Securities in Beijing, said
growth, though easing slightly, still beat
economists' forecasts, which would prompt Beijing
to continue its tight monetary policy.
"The first quarter GDP rose by 10.6%
year-on-year, which is above our and others'
forecast of 10.3%,” Chen said.
He said
inflation remained the top issue facing the
government, as rising prices have a direct impact
on people's livelihood, which would prompt Beijing
to continue its tightening measures.
The
central bank will have to continue its tight
monetary policy given the worrying inflation
outlook, Jun Ma, chief economist of Greater China
at Deutsche Bank Hong Kong, wrote in a research
note.
He said for several reasons the bank
believed that April CPI may spike up again to show
a gain of around 8.9% year-on-year and the
inflation outlook for May-June remained very
uncertain, and could be anywhere between 8% and
9.3%.
"First, since its recent trough at
the end of March, the daily agriculture price
index edged up again. Second, a number of price
hikes of processed food items have recently been
approved. Third, the pressure from raw material
cost and wage inflation is intensifying. In
particular, March PPI inflation shot up to 8%
year-on-year (reflecting further increases in
prices of energy and raw materials such as coal,
steel, and fertilizers), significantly above
February 6.6% and the highest since November 2004.
"Wage inflation probably has accelerated
as well due to the implementation of the labor law
in January this year and inflation-led demand for
wage hikes. Fourth, domestic grain prices are
under upward pressure due to rising fertilizer
costs, declining farmer interest in grain
production, and the surge in overseas grain
prices," he wrote.
The central bank was
under pressure to rely more on quantitative
measures such as the reserve requirement ratio and
bills and more aggressive window guidance to
enforce monetary and credit tightening, as it has
less flexibility to use the interest rate
instrument due to a surge in hot money inflows in
the first quarter.
"In our view, credit
conditions are tighter than any other times since
2004, especially for small and medium-sized
enterprises and this situation is likely to
continue for a while," he wrote.
A Goldman
Sachs (Asia) research note said the increase in
the reserve requirement demonstrates the central
bank's stance to anchor rising inflation
expectations despite the first-quarter moderation
in GDP growth and lower year-on-year inflation in
March.
"[W]e expect the government to
maintain its strict lending controls, accelerated
yuan appreciation pace, continued withdraws of
liquidity via open market operations and regular
hikes to the reserve requirement ratio," Hong
Liang and Yu Song wrote in the note.
They
maintained their forecast of two more increases in
interest rates (of 27 basis points each) this year
because of the elevated inflation risks.
Olivia Chung is
a senior Asia Times Online reporter.
(Copyright 2008 Asia Times Online Ltd. All
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