China's Economy Gets Even Hotter

Updated
China GDP 11.9%
China GDP 11.9%

China's gross domestic product expanded at a greater-than-expected rate in the most recent quarter, heightening concerns that the world's third-largest economy may be overheating, although consumer prices did ease slightly during the period.

The Chinese economy grew 11.9% in the first quarter versus the prior-year period, the fastest expansion in nearly three years and an acceleration over the previous quarter's growth of 10.7%. Economists' median forecast stood at 11.5%, according to a survey by Dow Jones Newswires.

The danger of such blistering growth is that capital gets funneled into wasteful projects. Much of the unprecedented liquidity injected into China's closed financial system as a response to the global economic crisis has already found its way into the nation's real estate market, where it has led to soaring prices and a Chinese housing bubble.

However, inflation data were mixed. Consumer prices eased in sequentially March, coming in below analysts' estimates. The Chinese consumer price index rose 2.4% vs. March 2009, but dipped slightly from February's reading of 2.7%. Analysts forecast March prices to rise 2.6%, according to Thomson Reuters. On the the other hand, wholesale prices for March rose 5.9% over last year, and ticked up sequentially from February's 5.4% increase.

More Bubbles?


Given China's massive, growing population -- nearly half of whom are currently peasants, but with rapid migration to urban areas -- Beijing officials have no choice but to keep growth at a breakneck pace. At the same time, they seem vividly aware of the consequences of funneling enormous amounts of stimulus through the economy in order to pick up the slack from sagging export markets. But the surge of stimulus has found its way into other assets, and the spike in real estate prices has led to mounting speculation that a broader bubble might be forming.

Still, with the government staking much of its legitimacy on continued rapid economic expansion, Chinese officials don't have the luxury of hitting the brakes outright, either. The central bank has already been telegraphing that a rise in the value of the yuan is in the cards. With double-digit GDP growth and authorities scrambling to stem inflation, a stronger yuan would help slow the Chinese economy and boost much-needed domestic consumption.

On Tuesday, Chinese President Hu Jintao rejected President Barack Obama's call to let the yuan appreciate against the dollar, saying the two nations "should respect each other's core interests and major concerns," and he affirmed that his country's monetary policy won't be swayed by "external pressure." Some high-profile lawmakers and scholars argue that by keeping its currency pegged to the dollar at a low level, China has fed global trade imbalances and in effect siphoned off jobs from other countries. A quarterly GDP increase of 11.9% isn't going to do much to quell that criticism.

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