China First-Quarter Growth Probably Eased in Boost for Wen Inflation Fight

New figures show that China’s GDP growth has decreased in the first quarter, which is actually good news because it will offset inflationary pressures. From Bloomberg News:

China’s growth probably slowed in the first quarter, helping to defuse the risk of overheating in an economy where inflation is estimated to be running at its fastest pace since 2008.

The government will report tomorrow that gross domestic product rose 9.4 percent from a year earlier, according to the median estimate in a Bloomberg News survey of 25 economists, down from last year’s peak rate of 11.9 percent. Meantime, separate figures will show consumer prices climbed 5.2 percent in March from a year before, the median forecast indicates.

The International Monetary Fund says the nation still hasn’t escaped overheating risks, warning in its semiannual economic outlook this week that “an abrupt slowdown of economic activity in China, perhaps following a credit and property boom and bust cycle, would adversely affect the whole region.”

Earlier this week George Soros had some harsh predictions about inflation in China absent moves to appreciate its currency.From San Francisco Chronicle:

The Chinese government’s decision to keep its currency weak is leading to higher risks of wage-price inflation, billionaire investor George Soros said.

While the policy helped insulate the nation from the financial crisis in 2008, the world’s second biggest economy has missed its chance to allow the currency to appreciate to control inflation, Soros, chairman of Soros Fund Management LLC, said yesterday at a conference in Bretton Woods, New Hampshire.

“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation,” Soros said. “The authorities missed that opportunity. You now have inflation somewhat out of control, and causing some serious danger of wage-price inflation.”

“This cannot continue indefinitely,” Soros said. “There’s great resistance with the government mechanism to relax the system which serves the interest in power very well. I find that the critical question for the future of China.”

The Chinese government does not seem to want any drastic policy moves to appreciate the currency, though  Wen Jiabao has continued to warn that inflationary pressures remain. From iMarket news:

Chinese Premier Wen Jiabao said liquidity levels and inflation pressure in the domestic economy are rising, but also warned about the risks of overtightening, noting the lagging effect of policy.

Wen’s comments, part of a transcript of a speech delivered to the State Council on Wednesday, highlighted the need to maintain the current policy stance, but also noted that capital inflows remain large and that sterilization operations need to be ongoing.

Overall economic conditions justify the government’s “prudent” monetary policy stance, Wen said, arguing that the trick will be in controlling the magnitude and pace at which policy is adjusted.

Wen said first quarter data showed inflation pressure remains large and there are still factors fueling price increases, noting imported inflation pressure from global excess liquidity conditions, a weak U.S. dollar and rising international crude and commodities prices.

He warned of a bigger impact on prices from rising labor costs as well as higher costs for Chinese companies following the government’s interest rate hikes.

Current price levels are still within a controllable range, he said, noting that base effects have played a bigger role in price increases so far this year.


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