China's Economy Surges 11%, Fuels Speculation of Interest Rate Hike

China's economy grew at a blistering 11.1% annual pace in the first quarter on the back of booming investment and exports, fuelling speculation that interest rates would need to rise again soon.

The growth rate announced on Thursday was broadly in line with the 11.0% forecast by economists in a Reuters poll but it marked an acceleration from 10.4% in the fourth quarter of 2006.

Markets in Asia though rebounded Friday, with investors returning to battered stocks like Canon as global markets took worries about Chinese growth and a possible interest rate rise in their stride.

Premier Wen Jiabao followed the release with a prompt warning on the need for Beijing to take timely steps to keep the world's fourth-largest economy on an even keel.

"We need to prevent the economy from shifting from relatively fast growth to a state of overheating and to prevent big ups and downs," Wen said in a statement on the government's Web site. "We will work hard to keep basic stability in the overall level of prices," he told a regular cabinet meeting.

The strong data prompted a number of economists to predict that the central bank would take further tightening steps soon.

The People's Bank of China, in an effort to rein in an investment boom, has already raised interest rates once and increased banks' required reserves three times this year.

"This is very strong. It means more tightening. I think there will be at least two more rate hikes and the reserve ratio will have to go up to 12% from 10.5%," said Chris Leung, China economist at DBS Bank in Hong Kong.

The National Bureau of Statistics said that annual consumer price inflation reached 3.3% in March, the first time it has gone above 3% -- the central bank's comfort level -- in more than two years.

China's stock markets rebounded Friday after tumbling more than 4.5% Thursday, as confidence returned after a brief panic triggered by rising inflation.

The figures prompted some analysts to raise their forecasts for full-year growth. Standard Chartered increased its 2007 GDP growth forecast to 10.6% from 9.6%. JPMorgan upped its forecast to 10.8% from 10.0%.

"Another big number proves that China's supertanker economy is still nowhere near slowing," Stephen Green, an economist with Standard Chartered in Shanghai, said in a note to clients.

Statistics agency spokesman Li Xiaochao told reporters that the economy might be on its way towards overheating, potentially heralding further tightening. "Whether we need to raise interest rates depends on whether our economy will turn to overheating from fairly fast. If this happens, interest rates need to be raised. If this does not happen, then there is no need to raise them," Li said.

He also said that China faced more inflationary pressures due to uncertainties over food prices and likely moves by Beijing to further deregulate controls over utility prices, driving up the prices of water and electricity.

But to some the figures, which included a pick-up in annual growth in urban fixed-asset investment to 26.8% in March from 23.4% in the first two months, already clearly signaled that growth was running too fast.

"I think it is overheating. Today they announced 11.1 percent first quarter growth. This is a sign of not controlling the economy well," Hiroshi Watanabe, Japan's vice finance minister for international affairs, said in Abu Dhabi.

Yuan In Focus

European Commission spokeswoman Amelia Torres, on the other hand, told reporters in Brussels that the accelerating growth was positive news for European exporters, adding that the EU hoped China's domestic demand would grow progressively.

Detailed figures suggested that was happening. Retail sales were up an annual 15.3% in March, accelerating from 14.7% in January-February and 13.7% in all of 2006.

Beijing has repeatedly said it hopes to boost domestic consumption to help rebalance its economy away from its current over-reliance on investment and exports. Those imbalances remained one of the most serious challenges facing policy makers, the statistics agency stressed on Thursday.

However, many economists say that to really trim the massive trade surplus, which doubled from a year earlier in the first three months to $46.4 billion, it needs to let the yuan appreciate more quickly.

The yuan on Thursday breached the psychologically important 7.7200 mark against the dollar for the first time since the central bank revalued it by 2.1% and decoupled it from a dollar peg in July 2005. It has now appreciated nearly 5.1% since then.

He Sheng, an analyst with Changjiang Securities in Shanghai, said the central bank could let the yuan strengthen more quickly because the trade surplus was probably an important reason for the sizzling growth in the first quarter.

"Yuan appreciation will pace up to show the government's determination in addressing the trade surplus, even though the exchange rate movement may have no immediate effect on trade," He said.