Economy

Red-hot growth fuels economy

By Hu Yuanyuan and Tang Zhihao (China Daily)
Updated: 2011-04-16 07:53

Jing Ulrich, chairman of Global Markets (China) at JP Morgan, said domestic and international food price volatility constitutes the main risk to the inflation outlook for the remainder of the year, as prices of agricultural produce are prone to surge in the event of adverse weather conditions.

"Inflation is likely to peak by mid-year, before moderating in the second half," Ulrich wrote in a research note.

Continuing wage inflation and policy-mandated rises in fuel prices and electricity tariffs should exert upward pressure on prices at the producer level, she added.

Stephen Green, China economist at Standard Chartered Plc, anticipated one more interest rate rise in the second quarter.

"We expect April and May CPI readings to be around the same level as in March but to peak again in June, at close to 6 percent year-on-year," said Green. He also raised the estimate for China's full-year GDP growth to 9.3 percent from 8.5 percent, taking account of the faster pace of growth at the start of the year.

The high level of CPI has affected every sector of business in China. Some are benefiting from the government's tightened monetary policy, while others are suffering.

"The hike in interest rates will boost the profitability of insurance companies because it will help them generate more revenue from fixed-income investment," said Dou Zeyun, an analyst at Ping An Securities.

In the face of Friday's figures, economists are discussing the possibility and timeframe of another interest rate hike. Stock market analysts said further rises will have a diminishing effect with relation to the stock market.

Li Xunlei, chief economist at Guotai Junan Securities, said there is likely to be less room for the central bank to tighten monetary policy, so the stock market is unlikely to take a serious hit.

According to a recent report from Goldman Sachs Group Inc, the Shanghai-Shenzhen 300 Index is expected to hit 3,500 points at the end of the second quarter, and 4,000 points by the end of the year.

To absorb excessive liquidity and control CPI, the central bank has also decided to apply a dynamic reserve ratio policy to lenders, by increasing the proportion of their capital that they have to keep as reserves.

Some analysts have that said small- and medium-sized banks will be most affected by the policy, because they may eventually find it impossible to lend to customers.

Analysts said life will be easier for the bigger banks that have a relatively lower reserve ratio and more capital.

Moody's Investors Service said the outlook for China's banking system remains stable because the domestic economy is expected to help banks produce strong earnings.

She Minhua, a banking analyst at Haitong Securities, said raising interest rates can be a positive for banks because it limits their loan potential and they are forced to be more selective when lending to companies.

Manufacturers of consumer goods have found that the rise in raw materials prices has imposed a heavy burden on their operations, as they are forced to either absorb the rise themselves or pass it on to customers, something which they say they have not done.

"In the past five years, we have not increased the prices of our products significantly," said Wang, a manager from Aokang Group Co, one of China's largest shoemakers in terms of sales.

"We have paid more attention to improving operational efficiency and introducing standardized production models to control costs," said Wang. "Higher efficiency means we can produce more goods in a shorter time period, and more orders will help us to maintain profits."

Meanwhile, the growing inflation pressure is also changing consumption habits.

Xin Shu, a 35-year-old editor, used to have breakfast at a chain restaurant close to his workplace, but recently, he has started to have breakfast at home if he can spare the time.

"I used to spend 5 yuan (70 cents) buying two pieces of deep-fried dough stick and a cup of soybean milk in the morning, but since last month, I've had to pay 8 yuan for the same food," said Xin.

He added that an increase of 3 yuan may sound small, but the growth rate is a staggering 60 percent.

Wang Lin, a Beijing-based 28-year-old company executive, has given up taking trips to the shopping malls because the price of most dresses is more than 500 yuan.

"Now I only purchase clothes online where a suit or a dress will only cost between 100 and 200 yuan, which is reasonable given my salary," said Wang.