Chinese Growth Beats Expectations - 15 April 2010

By: Mike Campbell

Chinese data just released show that the world’s third largest economy grew by a staggering 12% in Q1 2010. The inflation figure came in at 2.2% which was lower than many analysts had predicted and frees up the authorities from having to act now to cool the economy. There are concerns, both within China and abroad, that a housing bubble may inflate on the back of the cheap loans that the fiscal stimulus package has brought in. The cheap and plentiful loans have stoked up demand for property and this has led to a property boom. The government has reacted by putting a sales tax on homes and by raising the mortgage rate. The fiscal stimulus package has been very successful at building consumer confidence and has led to increased domestic spending.

The Q1 data will do nothing to relieve the pressure on China to let the Yuan float to a more realistic level. Analysts believe that the Chinese currency is substantially discounted and this gives Chinese exporters a big advantage compared to their foreign competitors. The Americans, in particular, have been applying pressure on the Chinese to let the Yuan float, but in a recent meeting, Chinese Premier Hu Jintao told his American counterpart that the move would not balance US-Sino trade nor help boost US employment: to quote Mandy Rice-Davies, “well he would say that, wouldn’t he?” However, the Premier did indicate that the Chinese policy on the Yuan was being revised to suit China’s own longer-term economic development plans. Ultimately, if China stands resolute on its currency position, it may spark a trade war between the West and China which may well harm the prospects for a meaningful global recovery. The Americans had delayed the release of a Treasury report which was widely expected to accuse China of currency manipulation and pave the way to trade sanctions.