China’s Economic Growth May Accelerate to 7.8% on Credit Boom

By Bloomberg News

July 14 (Bloomberg) -- China’s economy may have expanded 7.8 percent in the second quarter as record lending and surging investment drove a rebound from the weakest growth in almost a decade, a survey shows.

The median forecast of 20 economists in a Bloomberg News survey compares with a 6.1 percent expansion in the previous three months from a year earlier. The government will announce gross domestic product in Beijing on July 16.

China’s 4 trillion yuan ($585 billion) stimulus package and the scrapping of lending restrictions for banks powered a revival in the world’s third-largest economy, countering a collapse in exports. Investment in factories, property and roads surged 34 percent in the first six months of 2009 from a year earlier, the fastest pace in five years, the survey showed.

“China will be the first among major economies to confirm an economic recovery,” said Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong. Policy makers will use bill sales, instructions to banks, and loan regulations to “fine- tune” monetary policy, Tao said.

A rebound in GDP would snap a two-year run of progressively slower growth. The Shanghai Composite Index has climbed 80 percent from last year’s low, with PetroChina Co. and Industrial & Commercial Bank of China Ltd. contributing the biggest shares of the gain, as money floods the economy.

China’s slowdown deepened after government efforts from 2007 to cool the economy and the property market by raising interest rates and adding loan restrictions were exacerbated by the global financial crisis.

Maintaining Stability

Premier Wen Jiabao wants faster growth to create jobs and maintain social stability ahead of the 60th anniversary of Communist Party rule in October. Ethnic riots in Urumqi in the northwestern Xinjiang province on July 5 left at least 184 people dead, highlighting the potential for disorder.

“The outlook for exports and the job market remains grim, so Beijing won’t step on the brake until they’re assured of social stability,” Tao said.

Wen cautioned this month that a recovery is not yet on solid ground, citing falling profits and fiscal revenue, unemployment and weak global demand.

The central bank has kept interest rates and reserve requirements for lenders unchanged this year after cuts in 2008. It has stalled the yuan’s gains against the dollar for a year to help exporters.

‘Fragile’ Recovery

“China’s economic rebound is still fragile, so any drastic change to macroeconomic policies would be a spring frost that freezes the green shoots,” said Fan Jianping, head of the economic forecast department of the State Information Center, an affiliate of the nation’s top economic planning agency.

Record lending may inflate bubbles in stocks and property and add to bad-debt risks. The central bank pledged yesterday to do more to “guide” loan growth after previously urging more lending to small and medium-sized businesses.

Two government bill sales failed last week on speculation that the credit boom will spark inflation. That risk is not immediate. Consumer prices may have fallen 1.3 percent in June from a year earlier, the fifth monthly decline, with producer prices dropping a record 7.4 percent, the survey showed.

Industrial-output growth may have quickened to 9.5 percent in June, the fastest pace in nine months after eliminating seasonal distortions in January and February, the survey showed. Retail sales rose 15.3 percent from a year earlier, according to the economists’ forecasts.

New loans tripled to 7.37 trillion yuan in the six months through June from a year earlier, overshooting the central bank’s minimum target for the whole year by 47 percent.

--Li Yanping. Editors: Paul Panckhurst, Margo Towie.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net