China expansion fastest in 13 years

By John Ng

HONG KONG - China's economy expanded 11.4% in 2007, the fastest expansion in 13 years, mainly powered by exports and investment, even as growth slowed down slightly in the fourth quarter, according to government data released on Thursday.

Gross domestic product (GDP) increased to 24.66 trillion yuan (US$3.41 trillion) last year, bringing the Middle Kingdom closer to overtaking Germany as the world's third-largest economy after the United States and Japan.

The full-year growth, the highest since 1994, made 2007 the fifth consecutive year that GDP has expanded 10% or more, said Xie Fuzhan, director of the National Bureau of Statistics (NBS), at a press conference in Beijing.

GDP growth slowed in the last quarter of 2007 to 11.2% from 11.5% in the previous three months and 11.9% in the second quarter. The economy grew 11.1% from a year earlier in the first quarter last year, suggesting that government macro-economic controls to cool the economy were taking effect, Xie said.

The government raised interest rates six times last year and increased the minimum reserve ratio of commercial banks as it sought to take the steam out of the economy.

Of the three power engines pulling forward China's economy, exports and fixed-asset investment continued to outgrow domestic consumption in 2007, according to the NBS figures.

Exports grew 25.7% to $1.218 trillion in 2007, though the growth was 1.5 percentage points lower than that in the previous year, largely due to weaker US demand. Imports rose 20.8% to $955.8 billion, giving a 2007 trade surplus of $262.2 billion.

Actual foreign direct investment in 2007 rose 13.6% to $74.8 billion.

The trade surplus and inflow of foreign investment boosted China's foreign reserves to $1.53 trillion by end of 2007, up 43.3% from a year ago.

A booming property market accelerated the growth in fixed-asset investment last year. Investment totaled 13.724 trillion yuan, up 24.8% on a year earlier and 0.9% faster growth than in 2006. Investment in property development last year increased 30.2% to 2.528 trillion yuan, NBS statistics released this week showed. Developers are benefiting from strong demand for housing, with the average housing price in 70 major Chinese cities rising 7.6% last year.

Total retail sales of consumer goods, China's yardstick for measure domestic consumption, grew 16.8% to 8.921 trillion yuan, 3.1 percentage points higher than the rate of increase in the previous year.

Xie said without elaboration that China would take measures to counter the negative impact on its economy of a possible US economic recession. "Like others, we are paying close attention to the US economy and its impact on the world economy and China's economy. The United States and China are both important power engines for world economic growth. A slowing US economy no doubt would have a negative impact on the outlook of the global economy ... China will accordingly take relevant measure to reduce such negative impact."

The policy-setting Central Economic Work Conference at the end of last year decide to carry out a "prudent" fiscal policy, which means China will continue to increase government spending to sustain growth when exports are likely to slow down.

Declining to predict GDP growth in 2008, Xie expected China's economy would continue to grow "steadily and fast", adding that "a little bit slowing down in the growth rate should also be within our expectation".

Earlier, Fan Caiyue, an official with the National Development and Reform Commission - the country's top economic planning agency, said China's 2008 GDP growth was estimated at 11%.

Inflation
The country's consumer price index (CPI), a key measurement of inflation, advanced 4.8% in 2007, including an 11-year high of 6.9% in November, and higher than the government's target of 3% for the year.

Inflation in China has been fueled mainly by a spike in food prices. NBS said the price of meat, poultry and related products increased 31.7% in 2007 and the price of general foodstuffs gained 12.3%, pushing CPI up by 4 percentage points.

Imported inflation was also part of the equation, the bureau said, citing the high price of oil.

The government now appears to see inflation as public enemy No 1, awake to the possibility of social instability if discontent grows over prices increases of meat, oil and other daily necessities. Rising living costs were considered one reason people joined the 1989 student-led demonstrations at Tiananmen Square that ended with the bloody June 4 crackdown that year. Inflation at the time stood at around 25%.

Inflation "is quickly spreading from 'just' an economic issue to a potential social instability threat," said Michael Kurtz, an equity strategist at Bear Stearns Ltd in Hong Kong, according to Bloomberg.

Decided by the Central Economic Work Conference, China will adopt a "tighter" monetary policy to tighten credit to help curb inflation and excessive liquidity. Last week the government began to impose price controls on foodstuffs and raised again the required reserve ratio for commercial banks by half a percentage point.

Xie said China would continue face inflation pressure this year. "Even without any new factor to stimulate inflation, we still face the pressure of the carrying-forward inflation from last year. We need a number of measures to control price rises, but it will take time for these measures to show their effectiveness."

Fitch Ratings forecast today that inflation will average more than 5% this year, compared with an earlier Chinese Academy of Sciences prediction of 4.4%.

The Ministry of Finance meanwhile said the country's state-owned enterprises posted a 31.6% rise in 2007 total profits, buoyed by a strong economy. Total profits rose to a record 1.62 trillion yuan from 1.23 trillion yuan a year earlier, a ministry statement said.

The higher profits from 119,000 state-owned enterprises helped boost government coffers as they paid a record 1.57 trillion yuan in taxes last year, up 21.8%. Sales revenues grew 20.1% to 18 trillion yuan.

John Ng is a freelance journalist based in Hong Kong.