Can China constrain its “eye-popping growth”?

published 2 August 2007

Move over Germany. China's economic growth rate rose to 11.9% in the year to the second quarter, from 11.1% in the first quarter, well above the official 8% target. Goldman Sachs now expects Chinese growth of 12.3% in 2007, from an earlier forecast of 10.8%. This is the fastest rate since 1994 and enough to propel China from the world's fourth-largest economy to the third. With GDP of $2.7trn last year, China is already "breathing down Germany's neck", says Jane Macartney in The Times. But "it is not only the economy that showed eye-popping growth". The soaring cost of pork (up 70% this year) and grain pushed annual consumer price inflation to a 33-month high of 4.4% last month. Figures for industrial output, up 19.4% in the year to June, retail sales (16%) and investment in urban areas (28.5%) all beat projections.

China's central bank responded swiftly, raising the benchmark one-year lending rate 0.27% to 6.84% and the benchmark one-year deposit rate by the same margin to 3.33%; the third increase this year. The People's Bank of China referred to "controlling inflationary expectations", says Andrew Batson in The Wall Street Journal, suggesting it wants to stop workers from demanding higher wages as food prices leap. Meanwhile, the country's top planning agency said that preventing "overheating" is its "most important policy goal" for the second half of this year, says Bloomberg. It plans to use tax policies to "curb blind expansion in industries that consume large amounts of energy, pollute a lot and face overcapacity", adds Reuters.

But many believe China should also allow the yuan already trading at its highest level against the dollar since the fixed exchange-rate policy was ended in July 2005 to appreciate more quickly, which "could both ease domestic price pressures and soothe tensions with the US", says Batson. Writing in the Far East Economic Review, UBS's chief Asian economist, Jonathan Anderson, agrees. "The authorities have little to fear from letting the yuan move at a 10% year-on-year pace in the near term." They may not be quite ready to take the plunge, but the benefits "will gradually and steadily make themselves apparent".