Originally posted on China Real Time Report.
China reported continued rapid economic growth in the fourth quarter of 2009, but also a pickup in consumer-price inflation to its fastest rate in the year. Thats heightening the debate over the next steps the government should take. Economists weigh in below:
The time for stimulus is over, the time for tightening has begun. Another strong performance from fixed asset investment, steady growth in retail sales, and a surprise turnaround in exports in December mean that the Chinese economy is now firing on all cylinders. At the same time, CPI data for December shows inflationary pressure returning, earlier than expected, to the Chinese economy. -Tom Orlik, Stone & McCarthy Research Associates
Growth strengthened from 6.2% year-on-year in Q1 to 10.7% year-on-year in Q4. The sting in the tail is that inflation has tracked that growth profile higher over the course of the year. After a year of sequential producer and consumer price deflation, both the CPI and PPI moved into positive territory in December. Looking through the base effect, price pressures appear to have a reasonable degree of autonomous momentum, both increasing by 1.0% month on month. It is difficult to identify factors that will slow the pace of increase in prices over the course of 2010. Glenn Maguire, Societe Generale
We remain sanguine about general price inflation. Headline CPI did jump last month, to 1.9% from 0.6% in November and -0.5% in October. But the important factors are that 92% of the CPI increase was from food, and much of the food increase was due to a big year-on-year jump in vegetable prices, which we think was due to the base effect and short-term weather issues. We continue to expect CPI to average 3% for the year, and we dont expect Beijing to panic about CPI. Remember that rate hikes wont bring down the cost of veggies. Andy Rothman, CLSA
Today’s data [is] suggesting that tighter policy is just around the corner as Beijing seeks to prevent the economy from overheating. Current policy settings were put in place to deal with the emergency conditions facing China in early 2009, but the strong recovery shown in the data clearly point to a winding back of stimulus. We have already seen some initial steps in the direction of tighter policy, but higher policy rates and a stronger currency will also be part of the package an early tap on the brakes would be better than allowing the economy to accelerate too quickly, forcing Beijing to slam on the brakes at a later date. Brian Jackson, Royal Bank of Canada
The current rapid increase in prices will exacerbate inflation expectations and in turn boost actual price levels. The actual rate of inflation is close to 2% and will continue to rise in the future. Economic growth continues to speed up while industrial output growth continues to rebound and export growth exceeds expectation. Continued economic recovery and higher than expected inflation will result in an earlier policy exit. Zhu Jianfang and Hu Yifan, Citic Securities
Our relatively benign forecast of 2010 CPI inflation of 3.5% rests on the assumption that the government will tighten policy, especially monetary policy, decisively in time. Recent policy measures might have created an impression that financial conditions have been tightened in January. However, it is important to realize that these measures only came after an extraordinarily large amount of loans have been made in a very short time span in the first two weeks of January. In sequential terms, financial conditions have been loosened sharply at the beginning of 2010 compared to 2H2009 instead of being tightened. Our main concern for policy is insufficient tightening instead of over-tightening. -Yu Song & Helen Qiao, Goldman Sachs
The GDP figure was accompanied by rising inflation Officials will thus be rightly concerned that household inflation expectations, which are not well-anchored, are now worsening. Rapid credit growth in the first few weeks of January will only add to inflationary concerns. Fears of a housing bubble also persist as tightening measures introduced last year are not especially onerous. The risk is that the State Council will not tighten sufficiently raising the risks of overheating or a bubble in 2011. Ben Simpefendorfer, Royal Bank of Scotland