China's Growth Probably Exceeded 11% for Third Straight Quarter

By Nipa Piboontanasawat

Oct. 22 (Bloomberg) -- China's economy probably expanded more than 11 percent for a third straight quarter, raising the likelihood of more interest-rate increases to prevent a flood of export cash from fueling asset bubbles.

Gross domestic product expanded 11.5 percent in the three months to Sept. 30 from a year earlier, according to the median estimate of 26 economists surveyed by Bloomberg News, after jumping 11.9 percent in the second quarter. The statistics bureau may release the figures this week.

Slower global demand because of a weaker U.S. economy may curb growth of China's trade surplus, helping central banker Zhou Xiaochuan tame the wave of liquidity. The nation's securities regulator last week warned of ``great risks'' after the stock market added $2.5 trillion in market capitalization this year, almost the equivalent of 2006 GDP.

The government is ``stabilizing the liquidity problem rather than solving it,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ``China needs more tightening to address the risk of economic overheating.''

A stronger Chinese currency would make exports more expensive. That would help to curb a trade surplus that has already ballooned to $185.7 billion this year, topping the $177.5 billion record for all of 2006. It would also ease pressure for more monetary tightening after five interest-rate increases this year that pushed the benchmark one-year lending rate to a nine-year high of 7.29 percent.

The yuan has gained about 4 percent versus the U.S. dollar this year.

`Prick the Bubble'

Zhou told reporters last week that monetary controls so far ``haven't been very effective'' and steeper or more frequent rate increases are possible. The People's Bank of China this month told lenders to set aside 13 percent of deposits as reserves, compared with a 9 percent requirement at the start of the year.

``Time to prick the bubble,'' was the heading on a report this month by HSBC Holdings Plc chief China economist Qu Hongbin in Hong Kong that described inflated stock and property prices as the biggest risk to the economy.

The benchmark CSI 300 Index of stocks almost quadrupled in the past year, while house prices in the southern factory city of Shenzhen climbed 21 percent in August from a year earlier.

Letting a bubble grow ``only sets the stage for a bigger contraction at some point, which may have disastrous economic and social consequences,'' Qu said. The government may sell stakes in state companies to boost the supply of shares and increase taxes on investors, the economist said.

Food, Inflation

September's inflation rate was 6.2 percent, down from a 10- year high of 6.5 percent in August, the National Development and Reform Commission said last week. Slower food-price increases were probably the cause.

Full-year inflation may be 4.5 percent, according to Wang Tao, head of economics and strategy for Greater China in Beijing at Bank of America Corp. That's higher than both the central bank's target ceiling of 3 percent and the benchmark one-year deposit rate of 3.87 percent.

``The situation is getting worse,'' said Yang Hongyi, a 50- year-old driver who works for a transportation company in Beijing. ``You can't really eat less just because food is more expensive, so you end up spending less on other things.''

Weaker demand for exports because of a U.S. slowdown may be ``exactly the tonic China needs'' to reduce the problem of too much money in the financial system, Ben Simpfendorfer, a strategist at Royal Bank of Scotland Plc in Hong Kong, wrote in a report this month.

World Bank

The World Bank has a similar view.

``A moderate global slowdown would mitigate concerns of policy makers on overall growth, inflation and the trade surplus, while China's strong macroeconomic position provides room to adjust the domestic policy stance if necessary,'' it said in a quarterly report.

Still, China's rapid expansion of industrial production has raised concerns that it may be left with idle factories and bad loans if demand suddenly slows.

Fixed-asset investment in urban areas probably increased 26.6 percent in the first nine months from a year earlier, according to the economists' estimates.

China has been the biggest contributor to global growth this year, the International Monetary Fund says.

The following table shows economists' estimates for percentage changes in China's gross domestic product in the third quarter and 2007 and urban fixed-asset investment in the first nine months from a year earlier.

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GDP GDP FAI
3Q 2007 YTD
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Median 11.5% 11.5% 26.6%
Average 11.5% 11.4% 26.7%
High 12.3% 11.7% 27.2%
Low 10.7% 11.0% 26.0%
Number of Estimates 26 23 22
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Action Economics 11.5% 11.5% 26.7%
Asian Development Bank -- 11.2% --
Bank of America 11.6% 11.5% 26.8%
Bank of China (Hong Kong) 11.0% 11.0% 26.6%
Bank of East Asia 11.5% 11.5% 26.5%
Barclays Capital 11.3% -- --
Calyon -- 11.2% --
Capital Economics 11.4% 11.3% 26.2%
CFC Seymour 11.9% 11.7% 26.9%
CIMB-GK Research 11.7% 11.6% 26.5%
Citic Securities 11.1% 11.3% 26.8%
Citigroup 11.3% -- 26.6%
Daiwa Institute of Research 12.1% 11.5% 26.7%
Deutsche Bank 11.7% -- 27.0%
Forecast 11.0% 11.3% 26.5%
Goldman Sachs 11.5% -- 27.0%
Hang Seng Bank 11.5% 11.5% --
HSBC 11.5% 11.4% 26.5%
Industrial Bank 11.7% 11.5% 26.5%
International Monetary Fund -- 11.5% --
ING Groep 11.3% -- 26.5%
JPMorgan Chase 11.2% -- 26.5%
Lehman Brothers 11.1% 11.1% 27.0%
Mitsubishi UFJ Securities 11.1% 11.1% 26.0%
Nomura Securities 10.7% 11.1% --
Nordea Bank 12.0% 11.7% --
Societe Generale 12.1% -- 27.2%
Standard Chartered Bank 11.6% 11.5% 26.8%
United Overseas Bank 12.3% 11.5% 26.5%
World Bank -- 11.3% --
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