(April 16, 2010)

CHINA's economy grew by 11.9 per cent in the first quarter - its fastest growth for almost three years - fuelling fears of overheating and further policy tightening in the world's third-biggest economy. This was faster than market expectations of 11.5 per cent.

China's State Council said the nation's economic recovery had been further consolidated in recent months, but there were still serious problems and risks to deal with.

The GDP figures were a little stronger than expected, but given that the government has already started tightening and the effect of the stimulus winding down will be much clearer in the second half of the year, we don't at the moment expect additional severe tightening measures. Top of the list was an increasingly frothy real-estate market as property prices in China grew at their fastest pace in nearly five years in March, according to official figures. Despite the growth, inflation eased back to 2.4 per cent after hitting 2.7 per cent in the January-February period.

After the figures were released, Australian investors sold shares on fears of further policy tightening, the ASX 200 closing off its highs but still above the 5000 level.

Analysts remain divided as to whether the economy is growing too quickly and the possibility of a resultant property bubble punching a hole in the national economy.

"In short, growth is strong, but there are signs of overheating," Standard Chartered Bank economist Stephen Green said. "With stimulus already partly removed, the key is whether the authorities can steer the economy on to a more sustainable growth path, or whether generalised inflation and/or an asset bubble will break out in the second half and then trigger a bigger policy-induced slowdown for China in 2011."

Mr Green said: "The GDP figures were a little stronger than expected, but given that the government has already started tightening and the effect of the stimulus winding down will be much clearer in the second half of the year, we don't at the moment expect additional severe tightening measures.

"Other data continue to look sturdy," Mr Green said. Industrial production grew by 18.1 per cent year on year in March (versus 12.8 per cent in January-February), a little stronger than expected. Fixed asset investment, which surged above 30 per cent in January and stayed there all year on the back of a massive rise in bank lending, slowed further to 26.4 per cent for the first quarter compared with last year, as the government began clamping down on new loans. New project approvals slowed.

Economist Intelligence Units Beijing chief Stephen Joske said the clamp on local government infrastructure spending after last year's phenomenal growth was already under way and would be clearer in the data later this year. "Property is not yet in bubble territory except in some particular markets like Hainan," he said.

"Underlying demand is strong, so the main threat to property prices comes from changes in tax policy, but major changes are unlikely soon. The true size of the bad loans problems is probably understated but it's not a short-term or even long-term macro threat, as the central government has a strong fiscal position and will bail out local governments with severe debt problems."

Beijing University economics professor Michael Pettis said, however, in a recent blog post that the last bank bailout in China led to lower consumption nationally, exactly the opposite to what the government is seeking as it tries to rebalance China's growth from investment and exports towards domestic spending.

（Source from: theAustralian）