China's growth quickens but policy stays on hold

 China's economic growth picked up last quarter as expected as a combination of breakneck investment and buoyant bank lending more than made up for a slump in exports. But the 8.9 % growth rate fell short of some of the more optimistic predictions in the market, and the government said it would stick to the ultra-loose policies it has been following for the past year.

"China has begun, however, to implement its 'exit strategy', which is a gradual reduction in the level of stimulus (credit and infrastructure spending) in response to rising private investment and consumption," said Andy Rothman, a macro strategist for brokerage CLSA in Shanghai.

Last quarter's year-on-year growth exactly matched the forecast of a Reuters poll and was up from 7.9 % in the April-June period and just 6.1 % in the first three months of 2009 in the depths of the global downturn. But with GDP expanding 7.7 % in the first nine months, the government said it would now easily reach its target of 8 % average growth for the year as a whole, widely regarded as the minimum needed to keep a lid on unemployment.

"We have stressed a proactive fiscal policy and appropriately relaxed monetary stance to keep consistency and stability in economic policy -- according to my understanding, that means no change in policy," said Li Xiaochao, the spokesman of the National Bureau of Statistics.

A breakdown of growth this year showed just how effective Beijing's 4 trillion yuan ($585 billion) pump-priming package has been in galvanizing investment. Capital spending contributed 7.3 percentage points to headline growth of 7.7 % in the first three quarters, while consumption accounted for 4.0 percentage points. Net exports, meanwhile, subtracted 3.6 percentage points.

With the United States and Europe emerging from recession with huge debt burdens that will weigh on consumption, global policymakers are looking to China to pull more weight by expanding domestic demand. Being the main driver of China's double-digit growth of recent years fixed-asset investment in urban areas rose by a third in the first nine months. Capital spending by mostly private real estate developers is now surging in response to the ready availability of credit and growing confidence in the economy. Retail sales rose 15.5 % and industrial production growth quickened to 13.9 % in the 12 months to September. 

Most economists expect even stronger growth in 2010 given this year's relatively low base of comparison, the likelihood of a partial recovery in net exports and the fiscal stimulus already in the pipeline.