Alarm bell in China's engine room

Downtown Shanghai. Photo / Kenny Rodger.

China's growth rate accelerated to the fastest pace since 2007 in the fourth quarter, signalling a need to rein in credit growth that threatens to destabilise the world's fastest-growing major economy.

Gross domestic product rose 10.7 per cent from a year before, more than the median forecast of 10.5 per cent in a Bloomberg News survey, a statistics bureau report showed in Beijing. Asset-price gains, particularly in property, are creating problems for the Government to guide the economy, Ma Jiantang, who heads the bureau, said after the release.

The report may stoke speculation the central bank will start raising its benchmark interest rate and tighten restrictions on the nation's lenders. Minutes after the release, traders said the People's Bank of China guided three-month bill yields higher at an auction for the second time in two weeks.

"Today's data suggest that tighter policy is just around the corner," said Brian Jackson, a Hong Kong-based strategist on emerging markets at Royal Bank of Canada. "Policy makers will need to move soon to stop the economy from overheating," he said, forecasting officials will end an exchange-rate peg and boost interest rates starting this quarter.

Consumer prices rose a more-than-forecast 1.9 per cent in December from a year earlier, the second straight gain after nine declines. Producer prices climbed 1.7 per cent in December from a year earlier, after declining for the previous 12 months, yesterday's report showed.

"The inflation trend is too worrisome for the Government and we will continue to see policy tightened," said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

Meng predicted that the consumer-price inflation rate will exceed 3 per cent in coming months, and that the PBOC will increase banks' ratio of assets held as reserves by 1.5 percentage points by July 1.

The statement from the statistics bureau yesterday mirrored a Premier Wen Jiabao speech on January 19 by omitting a pledge to keep monetary policy "moderately loose."

The world may again this year count on China as the biggest engine of growth, with the International Monetary Fund projecting it to expand 9 per cent, compared with 1.3 per cent for advanced economies.

Mining company Rio Tinto Group reported a 49 per cent jump in fourth-quarter iron ore output on China's demand, while companies ranging from Ford and Volkswagen AG to Hong Kong billionaire Cheng Yu-tung's New World Department Store China Ltd are expanding in the nation.

After last year overtaking the US as the biggest car market and Germany as the biggest exporter, China is poised to supplant Japan in 2010 as the second-biggest economy.

According to Wen, policy makers' key tasks this year include managing credit growth, controlling inflation and countering property speculation. For the full year, GDP gained 8.7 per cent, beating Wen's 8 per cent target.

Retail sales rose 16.9 per cent after adjusting for consumer price changes, the bureau said. The Government previously said that gain was the biggest since 1986.

The economy's third straight quarterly acceleration highlights risks that inflation may surge and asset bubbles form after monetary policy committee member Fan Gang said in November that growth of more than 10 per cent is excessive.

Fourth-quarter economic growth was driven by an unprecedented $586 billion stimulus package, subsidies for consumer purchases and a credit-fuelled investment boom.

- BLOOMBERG