On target to overtake Germany as No. 3 economy, as government expected to take more action against price pressures, inflation. July 19 2007: 6:12 AM EDT
BEIJING (Reuters) -- China's annual economic growth surged in the second quarter to an 11-year high rate of 11.9 percent, cementing expectations of tighter policy to keep the world's fastest-growing major economy from overheating.
The figures, released on Thursday by the National Bureau of Statistics, leave China firmly on course to chalk up its fifth straight year of double-digit growth and to overtake Germany before long as the third-biggest economy in the world.
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"It's stunning. We should expect them to raise interest rates or reserve requirements at any moment," said Tim Condon, head of Asia research at Dutch bank ING in Singapore.
The spurt in gross domestic product growth from 11.1 percent in the first quarter blew past expectations of a 10.8 percent rise and prompted several banks to raise their 2007 growth forecasts.
Goldman Sachs (Charts, Fortune 500) now expects an eye-popping 12.3 percent, while JPMorgan Chase (Charts, Fortune 500) is projecting 11.3 percent. Both banks had previously forecast full-year growth of 10.8 percent.
Annual consumer price inflation in June also beat forecasts, jumping to a 33-month high of 4.4 percent from 3.4 percent in May due to a spike in the cost of pork and grain.
Li Xiaochao, the statistics agency's spokesman, said price pressures remained relatively strong, even though first-half consumer price inflation excluding food was just 0.7 percent.
"We will continue with moderate tightening to control the monetary and credit situation," Li told reporters.
Tai Hui, an economist with Standard Chartered Bank in Hong Kong, said 11.9 percent growth was "in the stratosphere."
"Obviously, this puts even more pressure on the authorities to take prompt action to look at their strategy," he said. "They may not call it overheating, but the truth is, these numbers are incredibly high."
Firing on all cylinders
Higher borrowing costs, five increases so far this year in the proportion of deposits that banks must hold in reserve, and a flurry of edicts by government planners have had little impact on the economy, which is firing on all cylinders.
Investment in fixed assets such as factories and real estate was up 25.9 percent in the first half of the year; the trade surplus is setting successive monthly records; and retail sales in the first six months grew at the strongest rate since 1997.
Qu Hongbin, chief China economist at HSBC in Hong Kong, said that as well as raising interest rates and banks' required reserves, the government was likely to impose new curbs on investment in sectors that guzzle energy and spew out pollution.
"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 the second half of 2007," he said in a note to clients.
While Beijing needs to control inflation, the ruling Communist Party must also find some 10 million jobs every year for workers leaving the land and flocking to the city, he noted.
And because rising inflation is almost entirely due to a surge in food prices, the central bank would not slam on the brakes, Qu said.
Indeed, given the current rate of economic growth, consumer price inflation of 4-5 percent 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," he added.
Among other figures released on Thursday, industrial output in June rose 19.4 percent from a year earlier, retail sales were up 16 percent and investment in urban areas in June was up 28.5 percent. All were stronger than expected.
After leapfrogging Britain in 2005 to become the fourth-largest economy, China is now breathing down Germany's neck.
Li said estimates of aggregate GDP vary depending on the exchange rates used. "But one thing is certain: we are drawing nearer to Germany and the gap between us is becoming smaller."
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