China's latest economic data show an attention-getting 11.9% surge in the first quarter's gross domestic product, combined with moderate inflation and slowing investment spending. Although China's leadership is clearly worried about a real-estate bubble, their next step is not obvious. Economists highlight what the mixed signals might mean for the future:
Growth is strong, but there are signs of overheating. With stimulus already partly removed, the key is whether the authorities can steer the economy onto a more sustainable growth path, or whether generalized inflation and/or an asset bubble will break out in the second half and then trigger a bigger policy-induced slowdown for China in 2011. - Stephen Green, Standard Chartered
With 11.9% year-on-year GDP growth surpassing potential growth, overheated demand not only exhausts spare resources but also overstretches the supply capacity of raw materials, energy and infrastructure, leading to rapid upward pressure on prices. This is likely to be exacerbated by the fast export recovery, given that warming global demand puts new orders to China's manufacturers which exhausts the spare manufacturing capacity and ultimately adds pressures on consumer goods. ... In sum, the latest data releases have pointed to rising overheating and inflation risks. -- Qu Hongbin, HSBCThe acceleration in growth argues for further policy tightening. Yet, the call is not straightforward. CPI inflation is currently lower relative to the last two tightening periods in 2004 and 2007. The government is also concerned about producing a 2008-style correction in the property market. ... The fact that residential investment is the major driver of growth remains a concern. Residential apartments are a more politically sensitive issue than, for instance, steel factories, meaning the government may be reluctant to tighten as aggressively as it has in the past towards other sectors. - Ben Simpfendorfer, Royal Bank of Scotland
CPI inflation remains muted, at least for now. However, after four quarters of consecutive above-potential-level of GDP growth we believe the output gap is closed. We think in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating. However, as CPI inflation remains low for now and policymakers remain very cautious on the external demand outlook we are likely to see more decisive tightening measures after CPI inflation rises to a relatively high level of say 3%-4%. - Yu Song & Helen Qiao, Goldman Sachs
With growth now strong but headline inflation still subdued, the government has a window of opportunity to reign in the policy stimulus before it tips over into excess. ... On interest rates, the government is faced with an unpalatable choice: raise rates and damp the ardor of investors in the real estate sector, or leave rates on hold and allow the property bubble to expand further, and risk inflationary expectations taking hold. - Tom Orlik, Stone & McCarthy Research Associates
For now, the print of data does change the economic policy debate. There has been growing speculation that China may move on interest rates in response to the stronger property data (both volume and price) in April. We believe that the better than expected price data in March will be sufficient to keep the PBoC sidelined until the second half of the year. ... China's exit strategy continues to be one of subtlety and restraint. - Glenn Maguire, Societe Generale
The acceleration in year-on-year growth in Q1 was entirely due to weakness a year ago. Growth has continued to slow in quarter-on-quarter terms and the economy is now expanding at an unremarkable pace. Price pressures too seem to be easing. While we expect policy tightening over the coming quarter, there is no need for dramatic measures. - Mark Williams, Capital Economics
