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In April 2010, annual consumer price inflation and bank lending accelerated faster than expectations, forcing the Chinese government to step up efforts to curb excessive credit amid fears of economic overheating. A renminbi appreciation and interest rate hikes are also widely expected in the second half of 2010, which can help to dampen inflationary pressures.

Summary

Although a small trade surplus re-emerged in April 2010 after China recorded in March 2010 the first monthly trade deficit since May 2004, the general downward trend in China’s trade balance during the first four months of 2010 helps support the Chinese government’s argument that China adheres to open market principles and does not intentionally pursue a trade surplus through currency manipulation.

Nevertheless, the Chinese government is widely expected to let the renminbi appreciate in the second half of 2010 amid international (especially US) pressures and accelerating consumer price inflation.

Meanwhile the Chinese government continues efforts to curb excessive credit amid fears of economic overheating and asset price bubbles. In April 2010, the government imposed a ban on loans for third-home purchases and raised mortgage rates and deposit (down payment) requirements for second-home purchases.

In May, the People’s Bank of China (PBC) – the central bank – ordered commercial banks to set aside more deposits as reserves for a third time in 2010, which effectively limit the amount of money they can lend. The PBC is widely expected to raise interest rates during the second half of 2010, in addition to letting the renminbi appreciate, in order to dampen inflationary pressures.

Foreign trade

China’s exports were valued at US$119.9 billion in April 2010, up by 30.5% year-on-year. In the previous month, exports grew 24.0% over a year earlier. April’s export growth was driven by rising machinery and electronics shipments thanks to increased orders from the USA, the EU and Japan.

Also in April 2010, imports rose 49.7% year-on-year to US$118.2 billion. The annual growth in imports slowed during the month compared to March 2010, when imports rose by a robust rate of 66.2% year-on-year to US$119.4 billion.

In April 2010, China recorded a trade surplus of US$1.7 billion, compared with a deficit of US$7.2 billion recorded in the previous month for the first time since 2004. However, compared with a year earlier, China’s trade surplus shrank 87.0% in April 2010. Although a small trade surplus re-emerged in April, the general downward trend in China’s trade balance during the first four months of 2010 helps support the government’s argument that China adheres to open market principles and does not intentionally pursue a trade surplus through currency manipulation.

Nevertheless, the Chinese government is widely expected to let the renminbi appreciate in the second half of 2010 amid international (especially US) pressures and accelerating inflation in the domestic market.

Foreign direct investment and fixed-asset investment

In the first quarter of 2010, FDI inflows into China rose by 7.7% over the same period of the previous year to reach US$23.4 billion. In March 2010 alone, FDI inflows reached US$9.4 billion, up 12.1% over the same month of the previous year. In February 2010, FDI inflows rose 2.2% year-on-year (to US$6.0 billion), slowing from an 8.7% year-on-year rise in January 2010, when FDI totalled US$8.2 billion.

However, China’s statistics in the first two months of the year are distorted by the Lunar New Year holiday, which in 2010 fell in February and resulted in fewer working days. Statistical data for FDI inflows in April 2010 have not yet been released.

Meanwhile, urban fixed asset investment – a measure of government spending on infrastructure and a key driver of China’s economy – rose 26.1% year-on-year in the first four months of 2010 to RMB4.7 trillion (US$684.6 billion). This annual growth rate was 4.4 percentage points lower than the same period of the previous year, when the authorities stepped up investment in fixed assets in an effort to drive the Chinese economy during the global downturn.

During the first four months of 2010, fixed asset investment in the primary sector (farming, fishing and forestry) expanded 16.5% from a year earlier whilst the industrial sector saw investment up 21.7% year-on-year and the tertiary sector (commerce, finance and services) registered a 29.7% year-on-year growth.

Inflation

In April 2010, the consumer price index (CPI) – a main measure of inflation – went up by 2.8% year-on-year. This is the fastest pace of increase in 18 months and compares with an annual deflation rate of 1.5% recorded a year earlier.

During the month, consumer prices grew by 2.7% year-on-year in the cities and 3.0% year-on-year in rural areas; food prices went up by 5.9% year-on-year while non-food prices increased by 1.3% year-on-year. Furthermore, property prices rose by 12.8% year-on-year whilst new bank lending stood at RMB774 billion (US$113 billion) in April 2010, up from RMB510.7 billion (US$74.5 billion) in the previous month.

With consumer inflation and bank lending both rising faster than expectations and property prices jumping by a record annual rate in April 2010, analysts are of the view that government’s measures to curb inflation and new bank lending are having little effect.

This has forced the government to introduce new measures: in April 2010, the government imposed a ban on loans for third-home purchases and raised mortgage rates and deposit requirements for second-home purchases to curb housing prices; in the following month, the PBC ordered commercial banks to set aside more deposits as reserves for a third time in 2010, which effectively limit the amount of money they can lend.

It is also expected that the PBC will have to raise interest rates during the second half of 2010, in addition to letting the renminbi appreciate, in an effort to dampen inflationary pressures.

Retail sales reached RMB1.2 trillion in April 2010, up 18.5% over a year earlier. During the month, retail sales rose by 18.9% year-on-year in urban areas and by 16.0% year-on-year in rural areas. In spite of rising consumer prices, consumer spending grew steadily, bolstered by renewed government subsidies for purchases of automobiles and home appliances during 2010. In Q1 2010, retail sales rose 17.9% year-on-year to reach RMB3.6 trillion, 2.9 percentage points higher than the annual growth rate recorded in the same period in 2009.

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