BEIJING (Dow Jones)--China's economy grew a brisk 11.9% from a year earlier in the first quarter of 2010, the government said Thursday, indicating a continued strong recovery and prompting economists to urge further tightening measures.
Economists had expected an 11.5% increase in gross domestic product for the three months ended March, according to a Dow Jones Newswires survey, following the 10.7% gain reported in the fourth quarter of 2009. The figure was boosted by low growth in the year-earlier period, which was due to the impact of the global financial crisis and was China's slowest quarterly expansion in nearly two decades.
But the 2.4% rise in the consumer price index in March was down from the 2.7% rise in February, partly due to inflated food prices during the Lunar New Year holiday in February. It was also below market expectations of a 2.6% rise. Due to the lower-than-expected figure, economists said Chinese authorities may hesitate to tighten policy until inflation is a clearer threat.
"This is an economy that is running too hot. Policy tightening is needed," said Royal Bank of Scotland economist Ben Simpfendorfer. But he added that the lower CPI reading in March may prompt the People's Bank of China to delay interest rate hikes despite strong growth readings. "So it is a dangerous set of figures."
"We think in the 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," said Goldman Sachs economist Yu Song in a note.
Nonetheless, policy makers are unlikely to take decisive tightening measures until CPI inflation reaches 3%-4%, he added.
Li Xiaochao, spokesman for the National Bureau of Statistics, said at a news briefing that China's CPI is "basically stable," but also listed factors contributing to rising prices, including imported inflation from global commodity prices and rising labor prices.
China's targeted rise of around 3% in the CPI this year "is still within reach," Li added.
The National Bureau of Statistics said in a statement the environment for economic development is "fairly complicated," and China would maintain its current policy stances of a proactive fiscal policy and a moderately loose monetary policy.
The nation's turnaround has been driven by its massive economic-stimulus plan, which ramped up government spending and led to an unprecedented lending spree by state-owned banks. China posted 8.7% growth for the full year of 2009, making it one of the few spots of fast growth in a world-wide recession.
But the rebound has been rapid enough to raise concerns the economy may be overheating, especially in some sectors such as property where there is a risk of asset bubbles forming.
A strongly worded statement by China's State Council on Wednesday indicates that authorities are aware of inflationary risks. The State Council, or cabinet, said inflationary expectations are strengthening and that property prices are rising excessively fast in some cities.
To cope with those issues, China's government has in recent months been moving to dial back the amount of new lending the banking system delivers to the economy, though officials still want to make sure financing remains supportive.
Banks started to shrink their new lending significantly in February and March, after the government set a smaller target for new loans this year. Fixed-asset investment in urban areas, an important measure of capital spending, has also been slowing from more than 30% growth last year. Investment was up 26.4% in the January-March period, down slightly from 26.6% in the January-February period. Economists had expected a 26.3% rise.
The possibility of price bubbles forming in property and other assets, driven in part by trade and investment inflows, may prompt China to allow the yuan to rise against the U.S. dollar. The currency has been held roughly fixed against the dollar since July 2008, and economists and other observers remain divided over how soon such a move is likely.
The producer price index rose 5.9% in March due to higher prices for commodities and raw materials, which will put further inflationary pressure on consumers if the costs are passed on to finished goods. The increase was up from the previous month's 5.4% rise. Economists had expected a 6.6% rise in the PPI, according to the poll.
Industrial production grew 18.1% in March, slightly slower than expectations of an 18.3% rise, but up from the 12.8% rise in February, which was affected by factory closures during the Lunar New Year holiday.
