By Nipa Piboontanasawat
Jan. 21 (Bloomberg) -- China's economic expansion probably cooled in the fourth quarter as U.S. demand for exports weakened and government measures to curb inflation and prevent overheating started to bite.
Gross domestic product rose 11.3 percent from a year earlier, according to the median estimate of 23 economists surveyed by Bloomberg News, easing from 11.5 percent in the previous three months. The statistics bureau may release the figures on Jan. 24.
Interest-rate increases, accelerated currency gains, credit curbs and price freezes are yet to tame the fastest inflation in 11 years. China risks applying the brakes too heavily, triggering a sudden slowdown just as the other main driver of global growth, the U.S., enters a recession.
``The government is clearly anxious to avoid derailing the real economy, especially in the face of rising global and financial market uncertainty,'' said Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase & Co.
The economy will probably grow 10.5 percent this year, down from 11.5 percent in 2007, according to the survey. That would be the first deceleration in seven years.
The State Council, China's cabinet, and the Communist Party's ruling Politburo say inflation is a key risk this year. Deaths and injuries in stampedes and crushes at sales of discounted food in Shanghai, Chengdu and Chongqing in the past year underscored the threat that rising prices pose to stability.
`High Alert' on Inflation
Consumer prices rose 6.5 percent in December, according to the survey, close to November's 6.9 percent gain. The government froze energy prices this month, tripled price-fixing fines and added curbs on increases for meat, eggs, cooking oil and noodles.
``Chinese policy makers are on high alert for inflation, and they will do whatever it takes to keep it under control,'' said Henry Li, an economist at Core Pacific-Yamaichi International Ltd. in Hong Kong. ``Freezing prices won't work in the long term -- they need to figure out what to do next.''
Exports grew at the slowest pace since 2002 in the fourth quarter as China's efforts to narrow record trade surpluses with export tax increases and curbs on energy-intensive, polluting industries coincided with weaker U.S. demand.
China's economy is largely powered by overseas sales after companies from Nokia Oyj to Samsung Electronics Co. set up factories to use cheap labor to make everything from mobile phones to washing machines.
Unmasking Industrial Overcapacity
Exports soared by five times after the nation joined the World Trade Organization in 2001, flooding the economy with cash and encouraging a wave of factory construction that's raised the risk of bad loans and sinking profits in a global slowdown.
``China has built up huge production capacity, which has been absorbed largely by ramping up exports,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``An export-led slowdown would reveal the overcapacity, leading to an inventory buildup and aggressive price cuts in the second half.''
Falling profits have the potential to trigger a slump in a stock index that's climbed 165 percent since the beginning of last year, Sun said. The CSI 300 has fallen almost 6 percent from its 2008 high.
Zhuzhou Smelter Group Co., China's biggest refined-zinc maker, says its net income probably declined more than 75 percent last year because of lower prices.
Chinese stocks are valued at about 133 percent of GDP --and 18 percent of household assets are in stocks and mutual funds, according to Sun.
Yuan's Bigger Role
Raising interest rates beyond their nine-year high to tackle inflation may attract more investment from abroad, fueling economic overheating. Pushing up banks' reserve ratios from 15 percent -- the highest level in at least 20 years -- to curb money supply may harm individual lenders.
``China's monetary policy faces unprecedented challenges,'' said Wang Tao, head of Greater China economics and strategy at Bank of America Corp. in Beijing.
The government is increasingly relying on a stronger yuan to cool the economy by making exports more expensive. The currency gained 1.3 percent versus the dollar in December, the biggest monthly increase since the end of a fixed exchange rate in July 2005.
Wang forecasts an 8 percent increase in 2008, up from 7 percent last year.
China may have overtaken Germany last year to become the world's third-biggest economy. At the end of 2006, gross domestic product was $2.7 trillion versus $2.9 trillion.
Fixed-asset investment in urban areas probably rose 26.4 percent from a year earlier, faster than the 24.5 percent pace of 2006. The government wants to avoid a rebound in factory and construction spending as local political leaders are appointed after last year's twice-a-decade Communist Party congress.
``These new leaders, especially those at the local levels, will be keen to show their fresh energy by kicking off new investment projects,'' said JPMorgan's Gong.