China's growth passes peak and more tightening feared

on May 17 2010 7:32 AM

A leading Chinese economic indicator showed that growth may have already peaked in the world's third-largest economy with the stock market falling on investor worries about the government's campaign to rein in property prices.

Adding to the impression that China is now facing stronger headwinds, a commerce ministry official said that exporters were feeling the pain of a weaker euro and the trade surplus will narrow sharply this year.

The main stock index in Shanghai <.SSEC> fell 5.1 percent to its lowest close in a year. [ID:nBJD003738] It was the steepest one-day fall in the Shanghai Composite Index in eight months.

Many analysts have said that overheating, not a steep slowdown, remains the bigger risk for China.

Nevertheless, in a sign that Beijing will be cautious before taking more steps to cool the economy, Premier Wen Jiabao warned over the weekend that the government must avoid negative consequences from piling up adjustment policies.

The economy's outlook remains very strong, but it may not have scope to accelerate over the next few months, according to The Conference Board. Its leading economic index for China, or LEI, rose to 1.5 percent in March.

Developers may have been front-loading projects in anticipation of controls on the real estate market that were subsequently implemented in late April, said Bill Adams, an economist with The Conference Board in Beijing.

The recent behavior of the LEI for China suggests the economic expansion is unlikely to accelerate further through the summer months, he added.

That would hardly be a catastrophe, but the Chinese stock market fell on fears that there could be worse to come as the government sets its sights on runaway property prices.

China still officially describes its monetary policy as appropriately loose. In practice, it has used banks' reserve requirements, lending controls and a series of property rules to gradually tamp down on the economy, which grew 11.9 percent year-on-year in the first quarter.

NEGATIVE CONSEQUENCES

Premier Wen Jiabao said on Saturday that the government faced a dilemma.

Pay attention to coordination in macroeconomic policy, so that it forms into a cohesive overall force and also prevent negative consequences from multiple overlapping policies, Wen told an audience of officials.

Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said the stock market slump was temporary, caused primarily by worries over the property clampdown.

The economy was slowing but still strong, and Premier Wen's comments indicated that the government would move only gingerly with further tightening, he said.

The basic tone of the government's macro-economic policies will not change this year and the possibility of an early exit from pro-growth measures has also been ruled out, Lu said.

The most feverishly awaited of any policy change by China is a resumption of yuan appreciation, with the currency effectively pegged to the dollar since mid-2008 to cushion the economy from the global financial crisis.

In fact, the Chinese currency has already been rising strongly, only against the euro, not the dollar, a commerce ministry spokesman said.

The yuan has risen about 14.5 percent against the euro during the past four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China's exports to European countries, Yao Jian told a news conference.

As it tracks the rising dollar, the yuan has appreciated against a trade-weighted basket of currencies, which many analysts believe could constrain the scope for any revaluation.

The yuan hit its strongest level against the euro since late 2002 on Monday as the euro tumbled against the dollar on global markets. Offshore dollar/yuan forwards jumped across the curve to imply less future yuan appreciation against the dollar as the U.S. currency climbed.

(Editing by Ken Wills & Jan Dahinten)

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