Fixed-asset investment rocketed 27.7% during the first quarter, well above the government's 18% target for 2006. Credit growth also took off, with the first four months of 2006 seeing US$197.1 in new loans, accounting for almost two-thirds of the central bank's US$312 billion loan growth target for the entire year.
Adding to the woes, the trade surplus for the first four months totaled US$33.8 billion, up 60.2% year-on-year. With FDI and non-FDI inflows also up, foreign exchange reserves surged by US$56 billion to US$875 billion, further complicating monetary policy.
It all added up to a 10.2% surge in GDP during the first quarter, higher than 2005's 9.9% growth and well above the government's 8% target for 2006. Money supply also beat the central bank's target for the 11th month in a row, with broad M2 supply, including cash and all deposits, increasing 18.9% year-on-year to US$3.9 trillion at the end of April.
More action is clearly needed, but the People's Bank of China is caught between a rock and a hard place. Having already hiked lending rates on April 27 by 27 basis points to 5.85%, its first move on policy rates since 2004, a second movement soon after could undermine efforts to boost domestic consumption, causing more pressure on the trade surplus.
Most watchers are predicting a hike in reserve requirements for commercial banks, but further rates moves are also likely to involve deposit rates, which remained unchanged in April at 2.25%. Such changes potentially create balance sheet problems for China's banks at a time that two of the Big Four are preparing for offshore listings. More lucrative deposit rates will also narrow the interest rate differential with major offshore money markets, removing an important barrier to hot money flows chasing RMB appreciation.
Some pressure is off now the yuan has finally broken the psychological 8 to the US dollar barrier and the government has announced its QDII scheme allowing limited offshore investment, but the net effect of China's inability to cool its economy is extra ammunition for critics of China's gradualist approach to currency reform.
Bitterness at backdown
The Bush administration's decision not to brand China a currency manipulator in its twice-yearly Treasury report on global exchange-rate policies angered US lawmakers, who threatened to take matters into their own hands. Senator Charles Schumer said his and Senator Lindsey Graham's bill to place a 27.5% tariff on China's US-bound exports "may be the only way to get China to play fair in the global marketplace". The bill was earlier delayed after the senators visited China in March, but they have vowed a relaunch in six months unless China takes concrete steps.
China's trade surplus for the first four months of 2006 totaled US$33.8 billion, up 60.2% year-on-year. Exports increased 25.8% to US$274.23 billion and imports rose a more modest 22.1% to US$240.48 billion. In April alone, the trade surplus shrank to US$10.46 billion from the US$11.2 billion recorded in March, but still exceeded the US$7.2 billion expected.
Incomes receive a boost
People's incomes are continuing to rise following a series of government initiatives to stimulate domestic consumption, including tax cuts and a lifting of the minimum wage. National Bureau of Statistics figures show urban disposable income per capita rose 10.8% year-on-year in the first quarter to US$410.78 after allowing for price rises, against an 8.6% rise in the first quarter last year.
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