In the first quarter China’s economy grew at an annual rate of 11.9%, according to official statistics released today, April 15. Economists surveyed by Bloomberg were expecting growth of just 11.7%.
Remember the days when investors worried that a 10% growth rate would set inflation on a rampage?
Well, all the evidence except the official inflation numbers says that danger is real.
Inflation at the consumer level in March grew at a 2.4% annual rate. That’s a drop from the 2.7% annual rate in February. Economists had expected that inflation would fall in March since February’s inflation rate was inflated by this year’s late timing of the annual lunar New Year’s holiday. So it’s not at all clear if the 0.3 percentage point drop is good or bad news for consumer inflation.
The message from other inflation measures, on the other hand, was very clear: Inflation is either out of control or threatens to become so.
For example, residential and commercial real-estate prices in 70 cities climbed 11.7 percent in March from a year earlier. That’s the biggest jump since the government began collecting this data in 2005. Officials at the central bank, the People’s Bank of China, have worried that the huge growth in China’s money supply as a result of government stimulus spending and as bank-lending spree in 2009 has created a bubble in asset prices for things such as real estate and stocks.
An additional worry is that too many of those bank loans have gone into wasteful investment in unneeded and ultimately unprofitable factories. Loans like that aren’t likely to b e repaid. Nothing in the first quarter numbers tempered that worry: Urban fixed-asset investment, a category that covers both property development and factories rose at a 26.4% rate in the quarter.
And finally, if inflation remains low at the consumer level, it continues to build at the wholesale level. Producer prices climbed at a 5.9% annual rate in March. That’s up from a 5.4% annual rate in February.
The result of all these numbers is to increase pressure on the Beijing government to slow growth by raising bank reserve requirements—again (which would also require banks to raise more capital) —and maybe, finally, raising central bank interest rates. The government is also likely to continue to rein in bank lending by increasing enforcement of loan quotas.
And it brings closer the day when, to aid in the inflation fight, the government will end the peg between the renminbi and the U.S. dollar and allow the Chinese currency to begin a very slow appreciation.