Back on growth track
Beijing’s policy easing has worked. China’s GDP increased at a 9 percent annual rate in the fourth quarter of 2011, a faster pace than the 8.3 and 8.5 percent pace in the previous two quarters. The GDP increase goes along with bank lending, which has been exceeding expectations since October, and with December’s encouraging data on industrial production and retail sales. The risks of a hard landing in the first quarter of 2012 are now lower, but excessive policy easing could spur unwanted inflation.
The headline showed GDP increased by 8.9 percent over the previous 12 months. That annual rate was a two-year low. But on a quarter-on-quarter basis, it looks like a corner has been turned. Better still, Chinese policy makers seem to be stimulating more balanced growth. The pace of increase in fixed asset investment eased further in December, to the lowest level in about a year, while retail sales grew at the fastest rate in nine months. December’s consumption may have been boosted by the Chinese New Year falling in early 2012, but rapid income growth also played a role. Disposable income rose by 8.4 percent during 2011.
Beijing appears to be willing to quickly loosen credit in response to early signs of strain. That seems to be what Premier Wen Jiabao had in mind when he said two weeks ago that China’s monetary policy should become more flexible, focused and ahead of the curve. Loans are still expected to grow about at about 15 percent in 2012, enough to support 9 percent GDP growth and 4 percent inflation.
But looser money can lead to higher inflation. Faster wage increases and planned salary tax cuts may pave the way for higher consumer prices in 2012. The annual inflation rate has eased since a July peak, thanks to comparisons with a period of spurting prices. But consumer prices rose 0.3 percent in December, and food prices were up by 1.2 percent. Beijing needs to make sure that it doesn’t give the economy a monetary overdose.