Financial Times: Fears grow that China is overheating

China Labour Bulletin is quoted in the following article. Copyright remains with the original publisher.

By Jamil Anderlini and Leslie Hook in Beijing, and Rahul Jacob in Hong Kong

20 January 2011

Concerns the Chinese economy is overheating mounted after offical figures revealed the economy grew faster than expected at the end of last year and inflation remained above target.

Meanwhile, Guangdong added to the fears after China’s biggest provincial economy increased its minimum wage by 18 to 26 per cent, the second big increase in less than a year.

The national economy expanded at an annual rate of 9.8 per cent in the final quarter of 2010, and grew 10.3 per cent for the entire year.

Consumer price inflation, a growing worry for policymakers, fell to 4.6 per cent in December from a more than two-year high of 5.1 per cent the previous month.

However, analysts said the moderation was mostly due to a high base the year before, and that prices would accelerate strongly in the first quarter of this year, complicating efforts to cool the economy without triggering a sharp slowdown.

For the whole year, consumer prices rose 3.3 per cent, above Beijing’s target of 3 per cent. Food prices, the main driver of inflation, rose 7.2 per cent for the year.

“[The economic] growth figures will encourage Beijing to act more decisively on taming inflation, which means more interest rate hikes are just around the corner,” said Qu Hongbin, an economist at HSBC.

The Shanghai Composite, China’s benchmark stock market index, dropped 2.9 per cent on Thursday after release of the data increased fears of impending monetary tightening.

A combination of rising inflation, concerns about social instability and labour shortages in key industrial areas have sparked a series of minimum wage increases across China. Beijing this month increased its minimum wage by 21 per cent. The government hopes raising wages will increase domestic consumption and help it move towards a new growth model less reliant on low-cost manufacturing, exports and investment.

Geoffrey Crothall of the China Labour Bulletin, a Hong Kong-based advocacy group, said the wage hike might not be enough to ease the labour shortages in the province, which accounts for a large percentage of the world’s production of everything from mobile phones to sneakers.

“Workers are very well informed about wages in the next town and in other provinces,” he said. “Their confidence that wages will go higher is rising.”

While concerns about inflation have grown in recent months, Ma Jiantang, commissioner for the National Bureau of Statistics, said the government would control inflation this year.

“We have full confidence that we will control the price level in 2011,” said Mr Ma, adding that China’s seven consecutive years of good harvests meant food prices would be kept under control.

The government has said it would adopt a “prudent” monetary policy this year. Beijing raised the amount banks must hold on reserve with the central bank seven times over the past year and increased interest rates twice in the fourth quarter.

These attempts to rein in extraordinarily loose monetary conditions, in place since the height of the financial crisis two years ago, have only been partially successful. Last year, Chinese banks moved trillions of renminbi in loans off their balance sheets and repackaged them as wealth management products, allowing them to evade the government’s restrictive lending quotas.

On Thursday, the Chinese banking regulator ordered banks to bring an estimated Rmb1,660bn ($252bn) of such off-balance sheet loans back on to their books this year.

The government’s attempts to manage liquidity have been further complicated by non-bank lending in the economy, which regulatory authorities have great difficulty quantifying. A central bank survey released on Thursday found that total non-bank lending in China last year amounted to about Rmb240bn, or 5.6 per cent, of total loans.

However, central bank officials acknowledged that the true scale of informal and underground lending was likely much larger.

China’s economy almost certainly overtook Japan’s last year to become the world’s second-largest after the US, ending more than 40 years for Japan as number two.
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