China Growth Moderates, But Inflation Rages On

The People's Bank of China ordered all Chinese lenders to set aside more reserves in an ongoing attempt to clamp down on excess lending, after the country reported on Wednesday that its inflation rate remained above 8% in March.

The central bank on Wednesday lifted the country's bank reserve ratio by 0.5%, the third such hike in this year. Banks will now be required to hold 16.0% of their deposits in reserve, effective April 25.

The National Bureau of Statistics reported Wednesday afternoon that China's consumer price index was up 8.3% in March this year; the inflation rate for the first quarter as a whole also stood at a worryingly high 8.0%. Although the March CPI was lower than the 8.7% recorded in February, which was a 12-year high, the figures are still far above the central government's annual target of 4.8%.

Sizzling food prices, which soared 21% in the aggregate in March on a yearly basis, were still the major problem for Chinese nationals, accounting for 6.8 percentage points of the monthly CPI increase. Housing prices and rents went up 6.6% on average in March, pushing up the inflation gauge by one percentage point further.

Beijing's statistics bureau reported at the same time that the country's gross domestic product grew 10.6% year to year in the first quarter, to 6.2 trillion yuan ($886.6 billion), moderating somewhat from the annual growth rate of 11.9% in 2007.

The economic engine continued to roar in the first quarter, regardless of disruptions caused by heavy snowstorms around the time of the Lunar New Year in late January/early February. Even so, a weaker U.S. economy and a stronger yuan lowered the first-quarter trade surplus, exerting drag on the growth momentum of the world's fourth-largest economy.

Breaking down domestic output by sector, primary-product industries (agriculture and related) generated 472 billion yuan ($67.4 billion) in the first quarter, up 2.8% from the previous year, while secondary industries (manufacturing) produced 3.1 trillion yuan ($442.9 billion), up 11.5%, and tertiary industries (services) contributed 2.6 trillion yuan ($371.4 billion), up 10.9% year on year.

Although higher prices and production costs might put a crimp in the Chinese economy, Citigroup said China's comparative advantage in manufacturing will not disappear. The brokerage noted that China's still relatively low labor costs, the economies of scale from extended production chains and the vast potential consumer market will likely maintain the competitiveness of Chinese products for a long time.

Citigroup predicted that China's own domestic market would pick up the slack if export industries falter. "Consumption benefiting from strengthened household income could boost domestic demand that would be positive for China's sustained growth. Upon completion of the transition, China could become a net importer rather than a net exporter," it said in a note published on Wednesday.