China's Economy May Grow at Fastest Pace in 12 Years (Update6)

China's Economy May Grow at Fastest Pace in 12 Years (Update6)

By Josephine Lau


A Chinese flag flies over the People's Bank of China June 29 (Bloomberg) -- China's economy may expand at the fastest pace in 12 years in 2007 and inflation will exceed the central bank's target, according to a report by economists at the People's Bank of China research department.

Gross domestic product may grow 10.8 percent, said the report published in the Beijing-based China Securities Journal today. Consumer prices may rise 3.2 percent, the fastest pace since 2004 and more than the central bank's 3 percent cap.

Stocks fell as the report added to speculation China will raise interest rates for a third time this year. Premier Wen Jiabao called for ``moderate tightening'' this month after inflation jumped to a 27-month high, factory spending accelerated and the stock market drew warnings of a bubble.

``The Chinese economy's still firing on all cylinders,'' said Tai Hui, an economist at Standard Chartered Bank Plc in Hong Kong. ``These numbers suggest that real interest rates may be even lower than expected, highlighting the need for higher rates.''

The CSI 300 Index fell 2.5 percent and posted its first monthly decline in almost a year. The benchmark has soared 84 percent this year after more than doubling in 2006.

Two interest-rate increases this year have failed to slow the economy's expansion. The benchmark one-year lending rate stands at 6.57 percent and the deposit rate is 3.06 percent.

Overtaking Germany?

China's economy is drawing closer to replacing Germany as the world's third-largest after expanding by at least 10 percent for each of the past four years. China last year reported gross domestic product of 20.9 trillion yuan ($2.6 trillion). That compared with Germany's $2.9 trillion, Japan's $4.5 trillion, and the U.S.'s $13.3 trillion.

The World Bank and the Organization for Economic Co- operation and Development expect China's economy to grow 10.4 percent in 2007. The International Monetary Fund and the Asian Development Bank forecast a 10 percent expansion.

Inflation has outpaced returns on bank deposits, encouraging households to shift money into shares. China's legislature today passed a law allowing the cabinet to scrap or reduce a 20 percent tax on interest income to try to cool the stock market, state news agency Xinhua reported.

Prices face ``potential pressure,'' the central bank said today in a separate statement on financial stability.

China's economy grew 11.1 percent in the first quarter and the government is due to report second-quarter figures in mid- July. Officials are concerned that an investment boom in stocks, factories and real estate could end in an abrupt economic slump.

Credit Growth

Record trade surpluses are spurring the expansion and pumping cash into the financial system, fueling growth in investment. The central bank has ordered lenders to set aside larger reserves five times this year to restrain credit.

The China Banking Regulatory Commission today urged small and medium-sized banks to adhere to a government policy of curbing loans to industries that have too much investment.

Wen signaled on June 14 that the central bank needed to raise interest rates or further curb bank lending. Consumer prices rose 3.4 percent in May from a year earlier because of soaring food costs. Factory investment rose 25.9 percent in the first five months.

The government in February announced an 8 percent growth target for 2007.

That was ``only a signal by the government that it didn't want further acceleration in investment and economic growth,'' said Huang Yiping, an economist with Citigroup Inc. in Hong Kong. ``Everybody knew it would be higher than that.''

China's economy expanded 10.7 percent in 2006 while consumer prices rose 1.5 percent. Gross domestic product grew by 10.9 percent in 1995.

To contact the reporters on this story: Josephine Lau in Beijing at jlau22@bloomberg.net