Thursday, April 15, 2010

China Overheats While Currency Tensions Remain

China, a country rapidly ascending into the global center stage, is now showing signs of a rapidly overheating economy.  It appears that Beijing must be taking plays out of "The Maestro", Alan Greenspan's book, as its real estate market appears to be in the midst of a bubble accompanied by double digit growth in the economy.

Government figures released yesterday showed urban housing prices in March rose 11.7%  during the previous 12 months, up from 10.7% the month before and the biggest increase since the index began nearly 5 years ago.

The figures released on Wednesday by the National Bureau of Statistics did suggest some cooling in demand for housing, as the 35.8% year-on-year increase in sales for the first quarter were less extreme than the 50% gain experienced at the end of last year.  The data series is showing extreme volatility.  Separate figures prepared by a private consulting firm indicated housing sales exploded in March by 90% versus February, despite sizable declines in the two prior months.

The Chinese economy grew at an 11.9% rate in the first quarter from a year ago, confirming Beijing's rapid recovery from the global economic crisis but raising new concerns about the risks of overheating.

The economy grew at its fastest rate in nearly 3 years and more quickly than economists had expected. The pace of growth puts new pressure on Beijing to consider tougher tightening measures, including appreciation in the exchange rate and increasing interest rates.

In spite of rising fears of overheating, consumer price inflation dipped to 2.4%  last month, from 2.7%  in February.  However, at the producer level, inflation continued to accelerate, increasing from 5.4% to 5.9% in March.

The government has already taken some steps to reduce the stimulus it is injecting into the economy, including much tighter control over bank lending.  However,  concerns about potential inflation come at a time of growing international pressure to abandon China’s currency peg against the U.S. Dollar.  Federal Reserve Chairman Ben Bernanke has called for a more flexible Renminbi, saying it would help keep China's  inflation from accelerating further.

Asian tiger Singapore reset the band in which its currency trades and said it would allow gradual appreciation.  This was designed to calm its booming economy, which grew at an annualized rate of 13.1% in the first quarter.

Political consideration continue to be the wild card.  Currency markets have been volatile as recent pressure from the U.S. over the Renminbi peg have been met with resistance since the Chinese do not want to be seen as caving to pressure.

Complicating the situation further is the growing worldwide desire for sanctions on Iran.  China is seen as critical for a successful diplomatic effort and the United States must tread lightly in order to secure Beijing's

Marko's Take

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