China Declares Crisis Past, Inflation a Concern

By: Joe McDonald & Jeremiah Marquez - AP Writers
By: Joe McDonald & Jeremiah Marquez - AP Writers

BEIJING (AP) - China declared it is over the global crisis and signaled a shift in focus to controlling inflation, sparking concern it could hamper growth and the country's contribution to a worldwide rebound.

Economic growth accelerated to 10.7 percent in the final quarter of 2009, the government said Thursday, beating most forecasts and driving the full-year expansion to 8.7 percent. But inflation also picked up, driven by a jump in food costs amid a torrent of stimulus spending and bank lending.

The strong numbers keep China on a course to replace Japan sometime later this year as the world's second-largest economy after the U.S.

Chinese leaders say the fiscal largesse will continue this year
but have ordered banks to curb credit after a surge in 2009 to a
record 9.5 trillion yuan ($1.39 trillion) in new loans. They worry
that reckless lending has fueled overinvestment in some industries
such as steel and cement and a possible bubble in stock and real
estate prices, which are up sharply.

Most Asian stock markets dropped as investors worried whether
Beijing can prevent overheating without hurting recovery in what is
now the world's third-largest economy. Hong Kong's main index lost
2 percent.

"The Chinese authorities seem to be juggling knives at this
juncture. Let's hope they don't cut themselves or drop the knives
on the audience," said Thomas Lam, chief economist at financial
services firm OSK-DMG in Singapore.

A solid Chinese recovery could help to drive a global rebound by
boosting demand for imported oil, industrial raw materials and
consumer goods. But inflation could disrupt that by eroding
consumer spending power and pushing up the price of China's
exports, hurting sales and demand for imports used to produce them
- factory machinery from the United States, Germany and Japan or
iron ore from Australia.

"We need to prevent overly fast price increases and closely
watch the trend in consumer inflation," said Ma Jiantong,
commissioner of the National Bureau of Statistics, at a news
conference.

Inflation is politically sensitive in China, where it can erode
the rising living standards that underpin the ruling Communist
Party's claim to power.

Analysts said they expect Beijing to take new steps to control
credit through tighter restrictions on lending and ordering banks
to set aside still more reserves following an increase last week.

They said an interest rate hike is likely but probably not until
the second half, because Chinese leaders need to create jobs and
worry about weak global demand.

"We think the strong inflation trend is likely to continue,"
Credit Suisse economist Dong Tao said in a report. The economic
improvement "is not enough to make Beijing completely comfortable
to accelerate the process of monetary tightening, as the external
environment remains fragile."

Economists also say China's central bank is unlikely to raise
rates until the U.S. Federal Reserve does so, which Beijing would
take as confirmation the American and global economies are
recovering.

Ma, the statistics official, declined to say when the central
bank might raise rates but said Beijing would avoid major policy
changes.

China was one of the healthiest economies heading into the
crisis in 2008 and was widely expected to be the first to emerge.
Its banks were unhurt by mortgage-related turmoil that battered
Western lenders and government debt was low compared with other
major economies.

That gave Beijing latitude to launch a 4 trillion yuan ($586
billion) stimulus that pumped money into the economy through public
works spending, tax cuts, subsidies to car buyers and aid to
industries.

"China has become the first, on the whole, to achieve recovery
and stabilization in its economy," Ma said.

The data Thursday showed consumer spending picking up, possibly
reducing the need for stimulus money to drive growth. December
retail sales rose 17.5 percent from a year earlier, up from
November's 15.8 percent growth.

Consumer inflation started to rise in the final quarter after
falling for most of the year, with November consumer prices rising
0.6 percent from a year earlier. That rate jumped to 1.9 percent in
December, driven by a 5 percent rise in food prices.

That was the sharpest one-month increase since February 2008, a
period of record inflation, according to Citigroup economist Ken
Peng.

China's total 2009 gross domestic output was 33.5 trillion yuan
($4.9 trillion), bringing it closer to overtaking Japan as the
second-largest economy after the United States. Exactly when that
will happen depends on the numbers from Tokyo - Japan is due to
report its own 2009 growth on Feb. 15.

Nevertheless, Ma said China is still poor on an income per
person basis. Average income for city dwellers in 2009 was 18,858
yuan ($2,700), while in the populous countryside it was just 5,153
yuan ($752).

"Despite the increase in our GDP and economic strength, we
still have to recognize that China is a developing country," he
said. "We have to be keenly aware of that."


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