China's GDP May Grow 10.4%, Inflation to Top 8% Again

China's economy probably expanded more than 10 percent in the first quarter and inflation may have stayed near an 11-year high, maintaining pressure on the government to do more to cool prices.

Gross domestic product rose 10.4 percent in the first quarter from a year earlier, according to the median estimate of 24 economists surveyed by Bloomberg News, after expanding 11.2 percent in the previous three months. The statistics bureau is due to release the figure at 2:30 p.m. tomorrow.

Faster yuan gains failed to stop inflation topping 8 percent for a second straight month in March, according to the survey. China's cabinet, the State Council, said this month that the world's fastest-growing major economy faces dual risks: overheating and the threat of a slowdown.

``Slower growth and high inflation have trapped the central bank in a difficult position,'' said Sherman Chan, an economist at Moody's Economy.com in Sydney. ``The authorities obviously do not want to see a sharp slowdown in economic growth, as it may have social implications, but high inflation is also a huge concern.''

The worst blizzards in half a century and weaker overseas demand for China's goods trimmed first-quarter growth.

Inflation may have eased to 8.2 percent after an 8.7 percent increase in February. The government aims to bring inflation down to 4.8 percent in 2008, matching the level for all of last year.

Stocks Tumble

The benchmark CSI 300 Index of stocks has tumbled 35 percent this year, partly on concern that government measures to cool prices will dent earnings. The index was down 1.8 percent as of the 11:30 a.m. break in trading in Shanghai after falling 6.5 percent yesterday.

To cool prices, China has let the yuan appreciate 4.4 percent this year versus the dollar, reducing import costs. It has also imposed price controls and raised banks' reserve requirements to a record.

``Tackling inflation requires a cocktail of measures and faster currency appreciation is one important ingredient,'' said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. Tao expects the yuan to climb at least 10 percent versus the dollar this year after a 7 percent gain in 2007, helping to reduce inflows of trade cash that threaten to fuel inflation.

China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March. The trade surplus pumped $41.4 billion into the financial system in the first quarter and foreign direct investment added $27.4 billion.

Borrowing Costs

Interest rates have stayed unchanged this year, after six increases in 2007, as the government tries to avoid encouraging inflows of speculative capital. Even so, Zhou Xiaochuan, the governor of the People's Bank of China, said this week that there's still room for an increase. The key one-year lending rate stands at 7.47 percent, while the one-year deposit rate is 4.14 percent.

Surging global commodities and food costs are maintaining pressure for China's prices to keep rising. World food prices rose 57 percent last month from a year earlier, according to the United Nations.

``We probably haven't seen the peak in prices yet, because rice prices are soaring and the rise in other staple food costs is also showing no sign of a slowdown,'' said economist Chan, of Moody's Economy.com. ``Overall, the inflation problem is due to supply shortages.''

Blizzard Disruptions

Snowstorms crimped first-quarter growth by disrupting the production of companies such as Zhuzhou Smelter Group Co. and Chenzhou Mining Group Co. A weakening appetite for exports may further cool China's expansion.

Group of Seven nations' policy makers said April 12 that a world economic slowdown may worsen amid an ``entrenched'' credit squeeze. China's export growth slowed in the first quarter and the trade surplus narrowed for the first time in more than three years as U.S. demand waned.

The following table shows economists' estimates for percentage changes in China's gross domestic product in the first quarter from a year earlier.


Source: bloomberg.com

Publication date: 4/15/2008

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