Unexpected spurt in China’s industrial production growth

Unexpected spurt in China’s industrial production growth
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First Published: Fri, Jun 15 2007. 02 22 AM IST
Updated: Fri, Jun 15 2007. 02 22 AM IST
China’s government reported industrial production growth unexpectedly accelerated in May, hours after Premier Wen Jiabao said further steps were needed to cool the world’s fastest growing major economy.
Output rose 18.1% in May from a year earlier, the National Bureau of Statistics said on Thursday, after gaining 17.4% in April. That compared with the 17% median estimate of 19 economists surveyed by Bloomberg.
Wen said on Wednesday that monetary policy needed “moderate tightening”, underscoring the failure of two interest rate increases this year to slow the economy. Record trade surpluses have pumped money into the financial system, stoking investment, inflation and a stock market boom.
“Monetary tightening of some form is now imminent,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.
The benchmark one-year lending rate is 6.57% and the deposit rate is 3.06%. The central bank has also ordered lenders to set aside more reserves five times this year.
The CSI 300 Index of stocks closed down 1% at 3pm in Shanghai. The yield on a three-year bond rose 0.1 percentage point to 3.4%. The yuan rose 0.06% against the US dollar to 7.6317.
Output growth was the fastest since the 18.5% pace of January and February. Figures for those months are combined to eliminate distortions caused by the timing of Lunar New Year holidays.
For the first five months, industrial production climbed 18.1% from the same period last year, up from 16.6% growth for all of 2006.
China’s economic problems include “rapid growth in industrial production and the trade surplus, fast investment growth, excessive liquidity, increasing inflationary pressure and energy conservation challenges,” Wen said.
The economy expanded 11.1% in the first quarter. Last year’s 10.7% growth was the fastest in 11 years. Inflation accelerated in May to 3.4%, the highest in more than two years. Monetary policy needed to be “stable with moderate tightening” to prevent the economy from overheating, the premier said.
“This is definitely an important signal, as it is the first time a top government official has mentioned ‘moderate tightening,’” said Morgan Stanley’s Wang. The previous official language was “prudent fiscal and monetary policy.”
A reference by Wen to tax measures may suggest the government plans to reduce or eliminate a 20% tax on interest earned on bank deposits to stem the flow of money to the stock market, Wang said.
The trade surplus rose 73% in May from a year earlier to $22.45 billion. A stronger yuan would help narrow the gap. The US treasury on Wednesday refrained from labelling the country a currency manipulator in a semi-annual report on exchange rates, angering some lawmakers who want faster appreciation and are proposing sanctions. “More than half of China’s industrial production is for export purposes and the trade surplus was quite large last month,” said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. “But the big jump may also mean an acceleration in fixed-asset investment.” BLOOMBERG
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First Published: Fri, Jun 15 2007. 02 22 AM IST
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