China's economy continues to surge ahead in Q2

Jul 19, 2007 - China's economy grew by 11.9 percent from a year earlier in the second quarter, easily surpassing economists' expectations of a 10.8 percent rise.

Annual consumer inflation in June reached 4.4 percent, a 33-month high.

Following are economists' reactions:

QU HONGBIN, CHIEF CHINA ECONOMIST, HSBC:

"Strong 2Q numbers are likely to prompt some immediate moves in policy tightening. The most likely measures include a 27bp hike in both lending and deposit rates, abolishing of a 20 percent income tax on deposit rates, a 50bp rise in the reserve ratio and new restrictions on lending to certain sectors (e.g. energy-intensive and heavily polluting sectors).

"The PBoC (central bank) is also likely to gradually sell the RMB 1.55 trln special treasury bonds to step up its sterilisation efforts to mop up excess liquidity. In addition, the NDRC (the economic planning agency) is also likely to impose some administrative controls on new investment projects in certain industries.

"However, all these measures are usual stuff. Although they may help stop growth in investment and credit from accelerating further, they won't cause a meaningful slowdown in growth in 2H07. Since higher CPI is almost all due to a surge in food prices, the central bank won't slam on the brakes.

"Forthcoming political events aside, Beijing leaders will have to carefully strike a balance between the need to create 10 million new jobs each year to absorb rural surplus labour and controlling inflation.

"Given the current rate of economic growth, a 4-5 percent CPI should not be seen as a big problem. As a result, the risk of over-tightening in the rest of the year is still remote, in our view. In fact, we see an upside risk to our whole-year GDP projections of 10.6 percent for this year and 11 percent for 2008."

JPMORGAN:

They revised their 2007 GDP growth forecast to 11.3 percent from 10.8 percent, and their 2008 GDP growth forecast to 10.5 percent from 9.5 percent.

They also raised their full-year 2007 CPI forecast to 3.3 percent from 3.0 percent, saying they looked for a gradual moderation in price rises towards the end of the year.

They said that they expect authorities to scrap the 20 percent tax on deposit interest income in the near term, and to raise both lending and deposit rates by 27 basis points once this quarter.

"In addition, the authorities are likely to resort to continuous administrative controls on credit and land supply to contain the risk of overheating.

"We believe that the PBoC is willing to look through short-term volatility in food prices, which will likely stabilise going towards the year-end.

"Fundamentally, we continue to look for faster RMB appreciation as an essential tool to tighten overall monetary conditions and to contain the further widening of the trade surplus.

"We expect USD/CNY to reach 7 by the end of this year. In this regard, the external trade figures in the coming months will be closely watched, especially regarding the impact of the VAT rebate cut on the export sector and the implications for the pace of currency appreciation."

BNP PARIBAS:

"Inflation is accelerating but is particularly driven by the higher food prices, which may be temporary. In any case, inflation remained modest at 3-4 percent year-on-year and is not a major threat yet.

"More worrying for the government would be the continued high growth in investment, which does not show signs of deceleration even after the series of tightening measures, including successive increases in interest rates and bank reserve requirement.

"The data out today will strengthen the case for further tightening, and in specific, we expect to see two more interest rate hikes by year-end, with the first one probably coming out very soon given the strong data today."

HONG LIANG, GOLDMAN SACHS:

The bank raised its forecast for 2007 GDP growth to 12.3 percent from 10.8 percent, and for 2007 consumer inflation to 4.0 percent from 3.6 percent, adding that the risks to their forecasts were on the upside. [ID:nPEK186522]

Liang said that the bank's forecasts assumed that decisive policy tightening would take place in the second half, potentially including two more 27-basis-point increases in interest rates and other administrative measures.

"We see risks on the upside to our growth and inflation forecasts. In particular, if policy tightening is more muted or delayed than expected, we believe growth would run even higher than our forecasts, so would inflation.

"In that case, the risks for some more pronounced cyclical volatilities in the next 12 months would significantly rise."

In a separate statement, they noted:

"The policy making process in the near future could be complicated by political events as the Chinese leadership is expected to be reshuffled around the 17th National Congress of the Chinese Communist Party in the fall of 2007.

"We expect the core leadership to remain unchanged, which assures policy continuity and stability. However, during the run-up to the election, we may see a slower-than-usual policy making process because of the uncertainties surrounding personnel decisions."