NEWS / Foreign Exchange

China?’s boom continues

China's economy is still surprisingly strong - as recent data on GDP, industrial production and exports have shown. Q1 GDP grew by 11.1% compared with the same period last year, which is the highest rate of growth since the overheating in 1994/1995. Strong Chinese growth reflects, firstly, that the global econ-omy is still in fine shape despite the slowdown in the US. This is very evident in both Europe and Asia. Meanwhile, there are some signs that US industry is starting to pick up the pace again.

Secondly, the strong numbers are also a reflection of the strength of the domestic economy in China. True, investment growth has slowed, but only to 25% y/y. In-frastructure is continuing to be developed at a rapid pace, and commodity imports are still rocketing. Com-modity prices have begun to rise again this year, pushed up by Chinese demand in particular. This has also had an impact on freight rates, which have been rising and are now close to historical highs.

Economic development in China gives rise to a number of questions regarding economic policy. Inflation, and with it the risk of overheating, appears now to be rising fast. While there may be a need for a more aggressive tightening of policy, we expect to see just two or three rate hikes this year, though they might be underpinned by increased reserve requirements. Finally, the ren-minbi will continue to strengthen at least as fast as has been seen over the past year. The difficult balancing act for the Chinese authorities between ensuring high growth and avoiding overheating has not become any easier.