China’s Economy Grows 10.7%, Fueling Fears Of More Tightening

China declared Thursday it has recovered from the global crisis after fourth-quarter growth jumped to 10.7% vs. a year earlier.

But inflation picked up, adding to pressure on Beijing to prevent overheating and keep its economic recovery on track.

Analysts say it's time for Beijing to start winding down its stimulus and focus on controlling inflation. Quarterly growth exceeded most forecasts and raised 2009's expansion to 8.7%, up from a low of 6.1% in the first quarter.

"China has become the first, on the whole, to achieve recovery and stabilization in its economy," said Ma Jiantang, commissioner of the National Bureau of Statistics, at a news conference. But he said China still faces "uncertainties" and a weak global outlook, so the government will avoid major changes in economic policy.

Chinese leaders say stimulus spending will continue, but they worry about rising prices and have ordered banks to curb lending after the record surge in 2009. Economists expect an interest-rate hike to cool demand for credit, tamp down inflation and prevent bubbles in real estate and stock prices, which are up sharply.

Reflecting the new pressures on the government, Ma said consumer prices picked up in the fourth quarter after falling for much of the year. Prices rose 0.6% in November from a year earlier , and the rate rose to 1.9% in December.

"That's a huge jump," said Citigroup economist Ken Peng. He said it was the sharpest one-month rise in inflation since February 2008, when China was suffering record consumer price hikes.

"Stimulus definitely should end," Peng said. "The authorities are absolutely right to be intensifying tightening efforts at this moment."

Inflation is especially politically sensitive in China, where rising prices erode economic gains that underpin the ruling Communist Party's claim to power.

China's total 2009 gross domestic output was 33.5 trillion yuan ($4.9 trillion), bringing it closer to overtaking Japan as the second-largest economy, after the U.S.

Still, Ma stressed that China sees itself as a poor country. He said average income for city dwellers in 2009 was 18,858 yuan ($2,700), while in the populous countryside it was just 5,153 yuan ($752).

"Despite the increase in our GDP and economic strength, we still have to recognize that China is a developing country," he said. "We have to be keenly aware of that."

Among other positive signs, Beijing reported earlier this month that exports in December grew for the first time in 14 months, rising by a robust 17.7%. Consumer spending also is growing at double-digit annual rates, driven by a 45% surge in auto sales in 2009 that saw China overtake the U.S. as the biggest car market.

But the flood of bank lending and stimulus spending last year helped to fuel speculation in real estate and stocks. Chinese leaders worry that housing prices are rising too fast for the country's poor majority and could lead to a dangerous bust that might leave banks with a burden of bad loans.

China's main stock index rose 80% last year, while newspapers are filled with stories about eye-popping prices being paid for luxury apartments.

"The price of assets is probably growing too fast," said Ma, the statistics official.

Banks were ordered last week to increase the amount of reserves they hold in an effort to prevent a surge in lending. The top bank regulator said Wednesday that the government will closely monitor credit.

"Turning the taps off might be a bigger challenge than turning them on," said Tom Orlik, an economist in Beijing for Stone & McCarthy Research Associates, in a report. "The challenge for China's government will be to manage the withdrawal of the stimulus without scaring the markets or pulling the rug out from under the recovery."

The Shanghai composite edged higher on the GDP news, though that followed a 2.9% sell-off on fears of lending curbs due to rapid growth.

Commodities and commodity-related stocks worldwide continued to retreat.