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Chinese economy - and worry - surge

Its trade is surging, lending is going through the roof and fresh data show China is now the largest auto market on the planet.

But the red-hot numbers are raising fresh concerns that the Asian superpower's economy is overheating and may be poised for a major correction that could stall a nascent global recovery.

Global commodity prices jumped Monday after China said imports spiked 55.9 per cent to $112.3-billion (U.S.) in December from the same month a year ago and exports rose 17.7 per cent to $130.7-billion, the first increase in 14 months.

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Lending by Chinese banks soared to 600 billion yuan ($88-billion) in the first week of January, according to local media reports, nearly twice the monthly average in the second half of 2009.

While the economic news is positive, some China watchers say the data may be interpreted as further evidence that the Chinese economy, spurred by a massive $600-billion stimulus package, has come too far, too quickly.

"It is very, very bullish on the surface, but there is always the implication of a contrarian view," Na Liu, China analyst at Scotia Capital, said in an interview.

Mr. Liu said there is a risk that Chinese importers are snapping up copper, iron ore and oil on an overly optimistic belief that demand for these commodities will spike in the spring when construction activity takes off. If the restocking proves to be too aggressive, Chinese demand for metals, coal and crude from countries like Canada and Australia could fall sharply.

"The bulls could be disappointed if there is no spike in [spring]imports," Mr. Liu said.

As well, the recent surge in lending by Chinese banks, which amounts to about 100 billion yuan a day, could prompt a hike in Chinese interest rates sooner than expected, which would also dampen economic performance.

"Superficially, it is very bullish because it shows liquidity is ample in China but that could draw the attention of the central bank that may decide to do something to stop it," said Mr. Liu, who believes the central bank could take action to tighten lending after the Chinese spring festival in mid-February.

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Indeed, the People's Bank of China moved last week to increase the yields on three-month bills for the first time in nearly five months. China's government acted quickly last year to insulate the country from the global downturn, introducing a $600-billion stimulus package designed to increase lending and economic activity. While much of the world was in recession, China's economy is believed to have expanded by more than 8 per cent last year.

Government officials have warned of the dangers of withdrawing the stimulus too quickly, but Chinese government researchers warned yesterday that the economy could grow by as much as 16 per cent this year and inflation could rise sharply, particularly in property prices, unless stimulus measures are reduced.

"If the government continues with the same strength of macroeconomic stimulus as in 2009, there will be notable economic overheating in 2010," Yao Zhizhong and He Fan of the Chinese Academy of Social Sciences said in an article published in the Chinese Securities Journal.

Stimulus measures, including incentives to buy cars, helped China overtake the United States as the world's largest car buyer last year, according to data released yesterday. Sales of cars, trucks and buses in China jumped 46 per cent to 13.6 million vehicles in 2009, compared with a 21 per cent decline to 10.4 million vehicles in the United States.

Still, China's surging property market is emerging as the largest threat to its economic stability. Average housing prices recently hit $2,200 per square metre in Beijing, one-third the average annual income in the capital. In Shanghai, prices are even higher, having shot up 60 per cent in 2009.

Scotia Capital's Mr. Liu said the Chinese government is now walking a "very fine line," trying to balance the need for economic stimulus with the disastrous ramifications of a potential property bubble.

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"If property prices continue to go higher, the government will have to do something about this. The Chinese public is very unhappy with this right now. People are saying homes are not affordable for the general public," he said.

With files from Bloomberg News

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About the Author
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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