International | Jul 19 2006
By Chris Shaw
China’s economic growth has again exceeded the market’s expectations with the country’s June quarter GDP rising 11.3% year-on-year, the fastest rate of growth since 1995. Driving the growth was a 30.8% quarter-on-quarter increase in fixed asset investment and a 19.5% increase in industrial production.
Market watchers suggest the growth result shows the tightening policies introduced to date by the Chinese government clearly have not been enough, so further action is required and is likely to come sooner rather than later.
Most experts agree interest rates will again be pushed higher, with Credit Suisse suggesting a further 0.27% increase is imminent along with other credit intervention measures. Goldman Sachs and Bank of America agree, while DBS Group suggests the increase will be 0.25% but will be accompanied by warnings of further increases if there are no clear signs the economy is slowing.
Credit Suisse takes the view the problem in the economy is not actually the fast rate of growth, but the rate of increases in credit growth, investment and net trade, but points out the government’s ability to deal with these issues is limited by the fixed exchange rate.
The broker estimates by maintaining a fixed exchange rate it means interest rates would need to rise by about 3% and deposit rates by about 2% to make monetary policy effective, so any rate increase in coming weeks is unlikely to have a significant impact in terms of slowing the economy.
It suggests though policy makers in China and now beginning to understand the costs to the economy resulting from the fixed exchange rate regime, so while no change in the currency is likely in the short-term there is hope for more policy flexibility in the future.
DBS agrees any revaluation of the renminbi is only a remote possibility in the short-term given the associated political and speculative capital inflow issues, but it estimates the chances of a revaluation have nevertheless increased slightly. It suggests a one-off revaluation and a widening of the adjustment band to 0.6% from 0.3% currently would show the government is serious about maintaining the economy’s health over the longer-term.
The World Bank continues to expect sustained growth in the Chinese economy of 9-10% going forward, which would suggest a slowdown from current levels. DBS for one suggests such a slowing is necessary, as the economy currently is showing signs of being overheated.
Credit Suisse is factoring in a slight slowdown in coming months, the broker forecasting growth to decline to 10.6% year-on-year in the third quarter and to 10% in the fourth quarter. Despite this, its full year forecast has been revised up to 10.5% from 10.1%, while for 2007 it is forecasting growth of 9.5%.
