China’s GDP: Slow Slowing Ahead

China’s report of 11.9 percent GDP growth in the first quarter of 2010 – the fastest pace since late 2007 – has China watchers buzzing and looking for how (if at all) Beijing may respond.

CLSA, the influential brokerage based in Hong Kong, put out a research note today titled “Fast but Not Frightening.” It interprets the results as meaning that China’s domestic economy is fully recovered, and it revised its full-year GDP growth forecast to between 9 and 10 percent (from 8 to 9 percent). It foresees no big reaction from Beijing – instead just a continuation of the incremental tightening to make sure a dangerous housing bubble does not inflate and that the economy overall does not overheat.

Our own China region analysts are also among the watchers, and they offer these thoughts:

Romeo Dator, co-manager of U.S. Global’s China Region Fund (USCOX):

I think the government will take steps to slow the economy further, but it won’t be interest rate hikes because inflation is still below the 3 percent threshold that the government has reportedly set. The government already has taken steps to slow lending and will continue to do that, most likely by hiking the bank reserve requirement ratio (RRR) sometime this quarter.

Michael Ding, senior China analyst:

It is not threatening, but that is not what China wants. Given the low (year-over-year) base in 1Q09, going forward GDP may not reach 11 percent in the next three quarters, but in any case, Q1 is too high and cannot be sustainable without causing an overheated economy. The goal is to have money supply growth at 17 percent, as was the case during the 2000s. It can be reached by the end of this year. For the next couple of months I don’t see inflation threatening to reach 3 percent, at which point the central bank will likely raise interest rates. The government may revalue the RMB in the short term to alleviate any inflationary pressure and to increase domestic consumption.


Frank Holmes,
for The Daily Reckoning

P.S. You can also visit my blog, Frank Talk, for more daily insight and commentary.

[Editor’s Note: Frank Holmes will be back for the Agora Financial Investment Symposium this July, along with other speakers including Marc Faber, Bill Bonner, and Doug Casey. You can find more details here.]

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