China's worryingly good results

While the world economy is still trying to emerge from recession, China is showing signs of economic overheating. The nation's statistics bureau announced yesterday that gross domestic product rose 10.7% year-on-year in the fourth quarter of 2009, which brings economic growth for the full year to 8.7% and confirms that China is on course to overtake Japan and become the world's second-largest economy.

Industrial production jumped by 18.5% in the year to December, while retail sales increased by 17.5%, boosted by government incentives for purchases of cars and electrical appliances. The government said the gain in retail sales last year was the biggest since 1986.

The figure didn't come as a surprise since towards the end of last year nearly all sectors in China received significant financing from banks that hastily issued loans under the government's order to fund a massive stimulus package. The 12-month consumer price inflation rose to 1.9% in December.

Beijing's Rmb4 trillion ($585 billion) economic stimulus plan, announced in November 2008, generated more than 85% of the country's overall economic growth last year, partly because China was already in the midst of nationwide infrastructure improvements when the crisis hit.

Citic Securities International predicts that this year the country will record economic growth of 10.1% with investment and consumption contributing 4.8% and 4.6% respectively, and the contribution from net exports set to be 0.7%. That is a more balanced growth than that of 2009, when investment contributed approximately 6.9% to GDP growth and consumption added 4.5%, while the contribution from net exports was a negative 2.7%.

China's overall economic vigour may continue to impress, but there are questions surrounding the sustainability of its performance. Stephen Roach, chairman of Morgan Stanley Asia, noted at the Asian Financial Forum earlier this week that China's growth was helped by "artificial stimulus". And the stimulus spending that led the revival has spurred speculation, raising alarm over potential asset bubbles.

Ma Jiantang, head of China's National Bureau of Statistics, said at a televised press conference in Beijing yesterday that despite the increase in GDP and the economic strength, "we have to recognise that China is still a developing country, and there are signs the economy is expanding too quickly with inflation picking up".

Both the housing market and the stockmarket have rebounded significantly since March 2009, and asset prices are certainly one of the major issues of focus in 2010. 

"We expect the government to closely monitor the asset price trend, and apply both economic measures, such as the recent reserve ratio, hike to control liquidity, and administrative measures, such as the tightening of policies for the housing market, to prevent prices from rising too quickly," said Yifan Hu, chief economist at Citic Securities.

Tightening of monetary policy is inevitable, said Chen Xingdong, chief China economist at BNP Paribas in Beijing, although he doesn't believe it is imminent. The central bank is likely to lift the reserve ratio requirement again but will not raise interest rates until the third quarter this year; the challenge now is to stave off inflation and ensure the stimulus goes into productive investment, he said.

"The government has carefully chosen the word 'restrain' instead of 'clamp down on'. There are so many infrastructure projects that began construction last year and we can't tell them to stop," Chen said.

Moreover, the government hasn't done enough to encourage consumption; it let rural residents acquire refrigerators at a bargain price, but hasn't ensured a stable power supply in rural areas. It has given car sales incentives but hasn't built enough proper roads, said BNP's Chen.

Still, the World Bank counts on China as the global growth engine. The bank on Wednesday raised its forecast for global expansion in 2010 to 2.7% from the 2% it projected in June last year, and predicted 9% growth in China this year.

China is a rising power and has played an important role in stabilising the global economy amid the financial crisis. We expect China to play a more important role, especially in promoting the voices of emerging economies, said Citic Securities' Hu.

In 2009, countries that depend on producing commodities, such as Australia and Brazil, benefited as demand from China drove up the price of materials. Helped by the trade with China, Asia's export-driven economies are sputtering back to life.

China's imports will grow faster than exports this year and "the pick-up in imports is an immediate boost to the world economy, especially the neighbouring countries in emerging Asia. The 'go-out' policy will lead to increasing investment overseas from Chinese investors," argued Hu.

Chinese companies will continue to snap up assets abroad at a strong pace this year, with outbound M&A deals likely to reach $50 billion, after recording an aggregate $46 billion of outbound acquisitions in 2009.

China's Zhejiang Geely Holding Group will sign a definitive agreement with Ford Motor Company to buy its Swedish unit Volvo as early as the first quarter, with the sale likely to close in the second quarter of 2010.

The buyout, estimated to cost Geely $2 billion or a third of the price that Ford paid for Volvo in 1999, will be one of the biggest moves by a Chinese car company in Europe or the US, and will give Geely significant access to American and European markets, while at the same time advancing its technical capabilities. It will also pave the way for other China auto makers to expand overseas.

Meanwhile, Bright Food Group, a Shanghai-based food producer, has made an all-cash bid to acquire the sugar and renewable energy business owned by Australia's CSR Limited for as much as $1.4 billion, although CSR has reportedly rejected the approach.

Companies from other sectors are also striving to go abroad. Property developers are hoping to build houses in the US, and Wang Shi, chairman of China's largest property developer, Vanke, has said he is eyeing residential property projects in the US.

"The world's top-10 developers will all be Chinese companies in the coming five years," Wang said at an EMBA alumni annual party at Fudan University in Shanghai.