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Latest update : 2010-01-21

China's economic growth continues to be the envy of the world but the steep gains seen by the Asian giant also raises wider questions on sustainability.


China’s startling economic growth rate in 2009 while the rest of the world struggled just to stay in the black was no mean feat, but the sharp increase also raises key challenges for the economic leadership of the Asian giant.   
The Chinese economy, currently the third biggest in the world, grew on the back of helpful monetary and fiscal policies. Alongside the gain, however, inflation has ticked up in worrying fashion, in turn alerting the world to the possibility of overheating.
“The government now faces the challenge to prevent speculative bubbles in the asset markets and a rapid rise of inflation without jeopardising economic growth” , You-Na Park, analyst at Frankfurt based Commerzbank says.
China's economy expanded by 8.7 percent in 2009 with the last three months of the year proving the strongest. Fourth quarter growth rate came in at 10.7 percent, the fastest in two years. Inflation, meanwhile, rose 1.9 percent in December from the same period a year ago compared with 0.6 percent in November.
Going by comments from a key official, China is already on the case to rein in rising prices and lending.
"We need to prevent the overly fast increases in prices and keep a close eye on the trend in prices," Ma Jiantang, commissioner of the National Bureau of Statistics, was quoted as saying.
The rhetoric follows action. The country is pushing to limit runaway bank lending levels. At the same time, banks have been told to fortify provisions made for bad debt. 
The crucial question is whether China is doing enough to ward of a spiral of rising prices. Observers from around the world are worried and talk of a bubble building up has been rife.
“Looking ahead, we expect interest rates to rise in China. However, we believe concerns about an asset bubble are overdone,” according to William Fong, Hong Kong based fund manager at Baring Asset Management. 
He cites declining total amounts of bad loans in 2009 and argues that bank lending has been used to finance the right things.
“New loans made in 2009 are mostly being used to fund Government and infrastructure projects, as well as to finance industrial capital spending. The suggestion that these loans are mainly being used for speculation in the equity and property markets is erroneous, in our opinion,” he says.
China’s continued strong economic performance also puts its currency in the spotlight. Complaints about the reminbi’s weakness have been both widespread and constant. The weak reminbi gives Chinese exports a competitive edge.
“We maintain that China should be considering a greater one-off revaluation of the  renminbi  once  confidence  over  the sustainability of global growth
is assured,” says Derek Halpenny European Head of Global Currency Research at Bank of Tokyo-Mitsubishi UFJ in London.
He favours a “larger one-off move” allowing the reminbi to appreciate later in the year.


Date created : 2010-01-21


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