China's premier, Wen Jiabao, has said that 2010 will be a very difficult year for the country's economy, yet in Q1 its performance was remarkable. China's gross domestic product (GDP) grew by 11.9 per cent in Q1 2010, outstripping the 8.7 per cent annual GDP growth achieved in 2009 and the 10.7 per cent growth of Q4 2009. The growth for Q1 was the fastest in almost three years. There are indeed areas of concern, most notably the threat of a bubble forming in the property market and potential instability in the banking sector. The data for Q1 should, however, inspire quiet confidence among China's leaders on the state of the economy, especially as China is expected to contribute a full third to this year's global growth and is set to overtake Japan as the world's second-largest economy.

China Quarterly GDP Growth 2007-2010 Q1,

% y-o-y


Source: China Monthly Economic Indicators;


A confident start to the year

The 11.9 per cent growth rate for Q1 2010 is impressive, although the figure is measured against the same period a year earlier -- a time when China's economy was at its crisis-induced nadir. In March, however, China registered a trade deficit of US$7.2 billion, the first since 2004. China's trade surplus for the whole quarter decreased by 76.7 per cent year-on-year, yet government officials characterised March's deficit as a temporary blip, partially caused by labour shortages which had the greatest impact on exporters of clothes, shoes and bags. China's exports gained 24 per cent year-on-year in March, following a 46 per cent increase in February. Imports leapt by 66 per cent in March, after a rise of 45 per cent the previous month.

China Monthly Imports 2006-2010 Q1,

% y-o-y, USD bn


China Monthly Exports 2006-2010 Q1,

% y-o-y, USD bn

width=310 width=284
Source: China Monthly Economic Indicators Source: China Monthly Economic Indicators

A return to double-digit GDP growth and rising prices of imported commodities have strengthened calls for the government to raise interest rates and allow the Chinese currency, the renminbi, steady at 6.83 to the US dollar since July 2008, to appreciate in Q2. After governmental research on possible impacts it is expected that the yuan will begin a gradual increase at the end of Q2 and may gain as much as 5 per cent to the US dollar by the end of the year. The issue of China's currency has long been an international issue, yet within China itself the debate is essentially between the People's Bank of China (PBoC), which favours an appreciation to help limit inflation, and the Ministry of Commerce, which resists appreciation due to the anticipated detrimental effects on China's exporters.

Although consumer prices increased 2.4 per cent year-on-year in March, lower than the 16-month high of 2.7 per cent in February, the World Bank has called for China's leaders to raise interest rates and allow the yuan to appreciate in order to control the prospect of inflation as well as dangers of asset price bubbles. China's leaders have until now gently rebuffed such calls but with growing signs of robust recovery in China and measured recovery in the rest of the world, indications are that the PBoC may finally be getting the upper hand in the debate.

China's industrial output increased 18.1 per cent year-on-year in March, down from 20.7 per cent in the first two months of the year, and investment growth decreased in Q1. Urban fixed-asset investment in Q1 rose by 26 per cent, the slowest growth rate in a year. Yet along with China's fast-growing exports, consumption has continued to expand, with retail sales growing 18 per cent year-on-year in Q1 and 21.5 per cent year-on-year in March.

Lingering concerns

Government attempts to curb excessive lending growth resulted in Chinese banks issuing only RMB 510.7 billion (US$74.8 billion) in new loans in March. The figure was substantially lower than the RMB 700.1 billion (US$102.5 billion) in loans extended in February, and the total amount for Q1 this year (RMB 2.6 trillion) was well in arrears of the RMB 4.6 trillion extended in the same period in 2009, although it still constituted 35 per cent of the government's full-year lending target of RMB 7.5 trillion. After a record lending spree of RMB 9.59 trillion in 2009, China's banks need to restore their capital. Yet the president of the Industrial & Commercial Bank of China (ICBC) stated in April that China's four largest publicly-traded banks still require RMB 480 billion in order to comply with regulatory requirements.

China New Monthly Bank Lending 2009-10,

% y-o-y, USD bn

Source: China Central Bank; THE BEIJING AXIS Analysis

Governmental bailouts of banks that made risky loans for local government projects may become a reality in China. The extent of the risks facing China's banks are still uncertain, although some analysts have estimated that the resulting non-performing loans could amount to as much as RMB 2.4 trillion.

Record growth in property prices in March increased fears of a bubble in China's housing market. Residential and commercial real estate prices in 70 cities increased 11.7 per cent year-on-year, and investment in real estate during Q1 increased by 35 per cent to RMB 659.4 billion (US$96.5 billion). In Q1 the Chinese government raised mortgage rates, re-imposed a sales tax as well as implemented stricter regulations for developers and banks. The rapid increase in house prices will add further impetus for the government not only to impose new property taxes but to also increase interest rates, especially if rising home values push April's consumer price index past 3 per cent.

China Total Fixed Asset Investment 07-10,

% y-o-y, USD bn

Source: National Bureau of Statistics of China

Road to recovery

The performance of China's economy in Q1 was another impressive milestone on its road of recovery from the lows of the global financial crisis in early 2009, giving Chinese leaders every reason to be quietly confident. Yet Q1 2010 is likely to have been the last quarter before the implementation of tighter monetary policies. All the factors now point in this direction, due to the need to limit inflation and a housing market bubble, and prevent overheating. Indeed, the last quarter may have been the culmination of China's recovery with the realisation that it's time to move on.

Barry van Wyk