| China's National Bureau of Statistics released first quarter and March economic data Friday morning. The data has attracted widespread market attention for two reasons. First, Chinese CPI will quite likely exceed 5 percent again, stirring up broad-based inflation concerns. Second, China will publish quarter-on-quarter GDP data and month-on-month data on three other indicators for the first time, indicating Chinese economic statistics are entering a new stage of development. Compared with traditional year-on-year figures, month-on-month and quarter-on-quarter data can reflect economic trends more dynamically and rapidly, providing a more timely and reliable basis for relevant economic policymaking and conforming to global statistics trends.
First quarter GDP data showed China grew 9.7 percent year-on-year, slightly slower than last month's 9.8 percent but far above market expectations of 9.4 percent, indicating the Chinese economy is maintaining its rapid pace of development. According to official quarter-on-quarter data published for the first time, China posted quarter-on-quarter GDP growth of 2.1 percent, or an annualized rate of 8.7 percent, below last quarter's 10 percent annualized rate. Although Chinese economic development has slowed slightly, it remains on a fairly strong development trend overall. For the time being, we stick with our prediction of 9.6 percent annual growth for the year as investment and consumption remain steady and net exports make a gradual comeback.
According to the newly released data, industrial value-added in March rose 14.8 percent year on year, and edged up 1.19 percent from February. Retail sales grew 17.4 percent year on year, and increased 1.34 percent month on mo?nth. Fixed-asset investment expanded 25 percent year-on-year, and gained 24.9 percent over last month. These data depict a healthy Chinese economy, with each indicator showing fairly strong performance.
Relevant economic figures confirm inflation remains the biggest threat to the Chinese economy. March CPI and PPI figures again climbed to their highest levels since July 2008, rising 5.4 percent and 7.3 percent year on year, 0.5 percent and 0.1 percent higher than last month's values respectively. Judging by the CPI's recent upswing, these figures still have some time to grow before they reach their peaks. At the same time, because the CPI remains so high, it looks difficult for the Chinese government to achieve its goal of maintaining annual inflation of 4 percent. PPI has again reached a new two-year high, reflecting the rising global prices of bulk commodities. These prices have already had a sustained, negative impact on Chinese economic production. At the same time, because global commodity prices will continue their ascent, we might have to wait quite a while to see PPI hit its peak, which will influence CPI as well.
The money supply data published Thursday afternoon make us even more worried about inflation. Based on this data, M2 and new RMB loans both exceeded market expectations, indicating inflation may further intensify in the future. Data published the same day show total social capital reached 4.2 trillion RMB. Although this figure dropped 322.5 billion RMB from the first quarter last year, according to the usual cycle, China's total annual social capital may approach 14 trillion again, close to last year's 14.3 trillion. Not only has no large decrease taken place, compared with 2005 to 2008 levels of about 4 trillion RMB, the 2011 capital total remains an astronomical figure. This total indicates the Chinese economy has power to grow. It also shows abundant liquidity. Clearly, Chinese monetary authorities' various efforts to shrink liquidity have not seen results. Substantial liquidity is still finding ways to flow into the economy.
We believe that China's inflation will be a policy problem for the next few years. In the short term, worsening inflation expectations, rising global commodity prices, liquidity and other factors will push China's inflation even higher. In the mid and long term, increasing wages and key prices will ensure inflation remains relatively high.
We think China's monetary policy will enter a new phase. Besides raising interest rates and quantitative contraction, China should further utilize exchange rate policy to further cool off the macroeconomy and control inflation. We predict the central bank will increase interest rates at least once in the second quarter by 25 basis points and up the required reserve ratio by 100 basis points. Chinese monetary authorities will speed up the RMB's appreciation against the dollar to control imported inflation. We stand by our argument that the RMB will appreciate by 6 percent against the dollar this year. It appreciated about 1 percent in the first quarter. We believe the exchange rate between the dollar and RMB will range from 6.38 to 6.43 by the end of the second quarter.
The author is head of China Economic Research at ANZ.
(This article was written in Chinese and translated by Matt Velker.)
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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