China’s Economy Grows 8.9%, Fastest Pace in a Year (Update2)

By Bloomberg News
Oct. 22 (Bloomberg) -- China’s economy expanded at the fastest pace in a year as stimulus spending and record lending growth helped the nation lead the world out of recession.
Gross domestic product rose 8.9 percent in the third quarter from a year earlier, the statistics bureau said in Beijing today. The median of 34 estimates in a Bloomberg News survey was for a 9 percent gain. Separate reports showed industrial production and retail sales accelerated in September.
The dollar headed higher and Asian stocks dropped on concern that the acceleration in China’s growth will spur policy makers to consider withdrawing record fiscal and monetary stimulus in coming quarters. Qin Xiao, chairman of China Merchants Bank Co., this week said it’s "urgent" for the central bank to tighten policy to avert asset-price bubbles.
"It’s all a question now of making sure they don’t overdo the stimulus," said Stephen Green, head of China research at Standard Chartered Plc. "The probability of stronger guidance to banks on lending growth is rising."
The MSCI Asia Pacific stock index slid 0.5 percent to
120.56 as of 12:30 p.m. in Hong Kong. China’s benchmark Shanghai Composite Index was little changed after losing as much as 0.8 percent earlier today. The dollar benefited from its status as a haven, advancing 0.2 percent to 91.17 yen and $1.4986 per euro.
The yuan was little changed, trading at 6.8270.

Cabinet Statement

While China’s cabinet said late yesterday that it will maintain stimulus measures, it also signaled that inflation concern will be an increasing focus of policymaking. The State Council said the economy exceeded officials’ expectations for the first nine months of the year.
Surging auto sales helped industrial production to rise
13.9 percent in September from a year earlier, the fastest pace in more than a year, today’s data showed. Wolfsburg, Germany- based Volkswagen AG, the biggest overseas carmaker in China, sold a record 150,000 vehicles in the nation in September.
Urban fixed-asset investment climbed 33.3 percent in the first nine months from a year earlier, the statistics bureau said, as the $586 billion stimulus plan spurred the construction of roads and power plants. Retail sales gained 15.5 percent in September.
Consumer prices fell 0.8 percent in September from a year earlier, the smallest drop since declines began in February.
Prices rose 0.4 percent in September from August. Producer prices slid 7 percent from a year earlier.

Annual Target

There is a "very good chance" that China will meet its economic growth target of 8 percent for this year, Vice Premier Li Keqiang told a conference in Beijing today.
For the first nine months of 2009, the economy grew 7.7 percent, with domestic demand accounting for all of the advance.
Consumption, including household spending, contributed 4 percentage points of the total and investment added 7.3 percentage points. A decline in net exports of goods and services shaved off 3.6 percentage points.
By contrast, trade contributed 2.6 percentage points to economic growth in 2007, before the global crisis slashed overseas demand for Chinese products.
The nation has countered an 11-month slide in exports with the stimulus package and a record $1.27 trillion in new loans this year. Policy makers also, from July last year, halted the yuan’s gains against the dollar, providing support to exporters battered by the contraction in overseas demand.

Impetus for World

China’s advance is aiding the global economy. Japan’s government today reported that the country’s exports fell at a slower pace in September in part as the drop in shipments to China halved from the previous month. Hiroshima, Japan-based Mazda Motor Corp. said today it sold a record 91,000 vehicle in China in the six months through September.
The third-quarter GDP gain underscores China’s role as the world’s fastest-growing major economy. U.S. government figures next week are projected to show a 3.1 percent annual rate of expansion in the third quarter from the previous three months.
Premier Wen Jiabao’s government now needs to oversee a transition to encouraging business and household spending to pick up the lead from government stimulus, analysts said.
"Compared with pouring money into the economy, draining money from the economy is a much tougher job for central banks," Qin, the chairman of China’s fifth-largest bank by market value, wrote in the Financial Times. "The dilemma is this: if we tighten monetary policy, there is a high possibility of a ‘second dip’ next year; and if we continue the loose policy, another asset bubble might be not far away."

Inflation Outlook

In yesterday’s State Council statement, China’s government said "the policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations."
That "change in rhetoric" suggests a tighter policy stance may be on the way, with an increase in banks’ reserve requirements possible in the first quarter of next year, said Mark Williams, a London-based economist at Capital Economics Ltd.
The Asian Development Bank has warned that keeping stimulus measures for too long risks diverting money into stocks and real estate, eroding bank asset quality and stoking inflation.
Banking regulator Liu Mingkang warned yesterday of rising credit risks for banks and also told them to be ready for shifts in government policy, while the central bank said on Oct. 20 that inflation pressures are gradually building.

Asset Prices

The 68 percent gain in the Shanghai Composite Index this year and a 73 percent increase in property sales in the first nine months highlight the risk of asset bubbles.
"This emergency intervention has been executed very fast and very successfully," Yolanda Fernandez Lommen, chief China economist at the Asian Development Bank in Beijing, said in an interview last week. "The question now is how long can the economy sustain the stimulus package and when is the moment to exit these policies?"
An exit may not be easy without unnerving investors: A plunge in July loan growth sent the benchmark stock index down more than 20 percent in August.
"China’s recovery is based on bank lending and infrastructure investment, not exports," said Alaistair Chan, an economist with Moody’s Economy.com in Sydney. "Exports remain weak. The government will not remove stimulus measures soon."

Do you think these numbers are sustainable? How much stimulus went into gambling in the domestic equities??? I haven't looked at deposit growth vs lending, but Im sure the picture ain't getting any better. Over summer i think their excessive credit lending could have been justified by a matching growth in deposits, but I don't know about now... anyone got more info about this?