FocusChina's strong Q1 GDP growth of 11.9% portends risks - analysts

15 April 2010 06:47  [Source: ICIS news]

(Revises headline and lead for clarity.)

By Fanny Zhang

GUANGZHOU (ICIS news)--China's strong annual GDP growth of 11.9% in the first quarter has boosted confidence in the global economic recovery, but there is a risk that the world’s third-largest economy could overheat, analysts said on Thursday.

China is the biggest importer and consumer of petrochemicals in Asia given its immense manufacturing base for consumer products.

The country's GDP grew at a strong pace to yuan (CNY) 8,058bn ($1,180bn), backed by a 19.6% year-on-year growth in industrial production, with output of chemical raw materials and chemical products surging 21.6%, based on data from the National Bureau of Statistics (NBS).

Fixed asset investments over the three-month period to March 2010 jumped 25.6% year on year to CNY3,532bn, while retail sales increased 17.9% to CNY3,637bn, according to official statistics.

“The figures indicate that the economy has been recovering extremely fast and we even see signs of overheating,” said Liu Qiyuan, chief analyst at Shenzhen-based China Merchants Securities.

A stable and healthy expansion for the remainder of the year could be ensured, with the government’s efforts to curb the excess money circulating in the financial system through implementing stricter credit standards, as well as through open-market operations, Liu said.

“The government has done very well in controlling the pace of the recovery, with effective measures taken to ensure continuous and gradual improvement, particularly in bank loan controls,” said Ma Cheng, analyst at Shanghai-based brokerage First-Trust Fund Management.

China may have to raise interest rates by the end of the second quarter or early third quarter to prevent asset bubbles from forming, particularly in the property market, analysts said.

The huge amount of liquidity in China's economy, due to heavy bank lending in 2009, led to a steady rise in consumer prices for four straight months to February, with inflation registered at 2.7%.

Inflation worries might have abated somewhat following the release of the first-quarter economic data, China Merchants Securities' Liu said.  

China's consumer price index (CPI), which is a gauge of retail prices, rose 2.2% year on year in the January-March period, while the country's production price index (PPI)  a measure of wholesale prices  climbed 5.2%, according to the official statistics.

“When domestic consumption has recovered to an ideal level, the government needs to raise interest rates to help curb demand in properties and other assets,” said Liu.

While the recovery was well under way, China has to steer through a more complicated economic environment, said NBS spokesperson Li Xiaochao.

This means the country must balance its economic growth objectives with the need to contain inflation, Li said.

($1 = CNY6.83)

Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
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By: Fanny Zhang
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