GDP rises 9.7% in Q1, inflation surges too

11:17, April 15, 2011      

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China's economy kept its rising momentum in the first quarter by growing 9.7 percent year-on-year, although Beijing has faced an increasingly daunt job to put soaring inflation under control.

Boosted by dynamics in manufacturing, drawn by accelerating consumption from affluent Chinese families, rising exports, and resilience in investment into infrastructure and big-item projects, China' gross domestic product (GDP) amounted to 9.6311 trillion yuan (US$1.72 trillion), the National Bureau of Statistics announced Friday.

However, inflation has shown no signs of abating, six months after Beijing decided to wind down its fiscal and monetary stimulus, enforced in late 2008 to thwart the impact of the global financial crisis. The consumer price index, a major gauge of inflation, jumped 5.38 percent in March, the highest in more than 3 years. The reading was 4.9 percent for both January and February.

Major components causing the higher levels of inflation are food price rise, which rose more than 11 percent in the first quarter. To make things possibly worse, PPI, or producer price index, tracking price rises at the gate of factories, soared 7.3 percent in March, which, economists believe, will be translated to elevated CPI numbers in the coming months.

Analysts therefore predict that inflation in the world's second largest economy won't peak till late in the year, which is to pose a graver difficulty for Beijing to rein in the annual inflation rate within its target – 4 percent, set by the State Council, China's central government.

Monetary tightening is surely to be continued, economists say. The People's Bank of China, the central bank, is expected to raise interest rates, commercial banks' required reserve ratio of total deposits, and the exchange rates of the yuan with major global currencies.

The central bank has this year hiked the required reserve ratio three times, 50 basic points each, and the deposit and lending interest rate twice, 25 basic points each. Lately, the appreciation of the yuan has regained speed. Rising value of the yuan, though making exports more expensive, encourages imports as products shipped from abroad are sold cheaper in China markets, which drags down CPI.

The International Monetary Fund (IMF), earlier this month projected that China's economy will grow 9.6 percent in 2011 and 9.5 percent next year. Together with the World Bank and other international organizations, it has warned that China could face increasing pressure from credit and asset bubbles.

China's Premier Wen Jiabao, discussing the first-quarter statistics with his ministers Wednesday, said that his government will stick to the “prudent monetary policy”, and listed inflation control as Beijing's No 1 job this year.

Chinese economists believe that the outsize excessive lending policy taken by nearly all governments in the aftermath of global financial crisis, and major central banks' “quantitative easing” by injecting tens of billions dollars into the global market through buying government debts, have led to a credit boom and caused price rises across the board.

Some of global credit crest has spilled over to China. Thursday, China's central bank said its foreign exchange reserve has jumped 24.4 percent in the first three months, topping the US$ 3 trillion landmark. Although China's first quarter trade registered $1 billion deficit, the central bank bought in massive foreign currencies on the market. The unplanned injection of RMB credit has been a major factor, causing liquidity over-flow and inflation in China.

The central bank reported Thursday that total national financing rose to 14.27 trillion yuan in 2010. In the first quarter this year, China's total national financing hit 4.19 trillion yuan, 322 billion yuan less than the same period last year, as Beijing intensified its regulation on credit release.

By Li Hong, People's Daily Online
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