China’s gross domestic product grew a spectacular 11.9% in the first quarter of 2010, compared to the same period a year before. Qu Hongbin, an economist with HSBC, figures that China’s GDP is expanding at an annualized rate of nearly 11%.
That’s darn fast. Perhaps too fast. Reports from economists about the Q1 figures featured the word “overheating.” It’s hard to tell when a rapid-growth economy like China’s is overheating, but economists are getting concerned that some of the risks associated with China’s giant stimulus program – inflationary pressures and asset bubbles – are intensifying.
That was clear in other data released on Wednesday that solidified fears that China’s roaring real estate market is heading into dangerous nosebleed territory. The government’s main urban property-price index rose a whopping 11.7% in March from a year earlier, the largest increase in five years. This jump comes despite concerted efforts by the Chinese government since late last year to cool off the market by, for example, tightening up mortgage lending.
China’s policymakers are clearly worried as well. The State Council on Wednesday released its assessment of the economy, and its comments pointed to much more stringent measures to curb excessive property price increases, stabilize inflationary pressures and slow down investment. Economists are predicting that over the coming months the government will further raise the level of reserves the banks must hold in order to curtail credit growth, hike interest rates, tamp down investment in infrastructure projects (which were the mainstay of the state’s stimulus program), and take specific steps to control the explosion of property prices, perhaps including new taxes and an increase in the minimum down payment necessary to get a mortgage. Here’s what Deutsche Bank chief China economist Jun Ma said in a note to investors:
We think there is now a clear consensus that property bubbles, inflation, and overheating are major risks to the economy. Specific actions to cool off the property markets and control bank lending for infrastructure investments will be intensive in the coming 1-3 months, and further measures (including administrative price controls) to stabilize CPI will likely be adopted from June-July when CPI inflation rises to 4% yoy.
There are implications of all of this for the entire global economy. Slower infrastructure investment could well mean lower commodity prices, as well as a reduced appetite in China for exports from neighboring Asian countries (which have been a key reason for the region’s overall rebound from the recession). I also think the first quarter results make it much more likely that Beijing will allow the yuan to appreciate as inflation-fighting takes precedence over pro-growth export promotion.
Generally, I also think that the recent data from China, and the government’s reaction to it, vindicates those (like me) who have been warning of the potentially negative fallout from China’s stimulus efforts for some time. It was inevitable that the excessive credit expansion undertaken last year by Chinese banks (as part of government stimulus policy) would eventually come back to haunt the economy in the form of asset bubbles and bad debts. The perception among some analysts that China’s “different” economic model would somehow protect it from such downside risks obviously doesn’t hold water. Hopefully China’s policymakers can extricate themselves from the mess they’ve gotten themselves into without major damage.