Chinas Economic Growth Points to Possible Currency Revaluation

China’s GDP grew at an annualized rate of 11.9% in the first quarter of the year and experts now predict this may lead to an earlier revaluation of the Yuan on the international currency (forex online) market. The rate of expansion was the fastest seen since 2007 and was slightly higher than expected, while consumer price inflation was surprisingly low at 2.2%. Consumer prices rose 2.4% in March compared to a year earlier.

The figures have helped fuel a debate among experts about whether the recent fiscal stimulus package could be contributing to the risk of an overheating economy. They will also complicate debate in Beijing about when to raise interest rates, which were cut in 2008 to counteract the effects of the global financial downturn.

Cheap plentiful loans are helping to push up housing prices and leading to fears of a bubble. The government has increased mortgage rates and introduced a new sales tax on homes to counteract this effect. Economists say that the GDP figures would now justify firmer measures to reduce inflation.

“We think in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating,” Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients.
However the low rate of inflation has fuelled speculation that there will be a currency revaluation. Either policy-that is a rise in interest rates or an increase in the value of the Yuan-could be used to help slow the Chinese economy.

Unlike a host of its Asian counterparts, including India and Malaysia, China has kept its benchmark interest rates unchanged, even as it leads the way in the global economic recovery. Until now the central bank has relied on curbing credit growth rather than acting on interest rates or the exchange rate to keep the economy on an even keel.

China has been under persistent pressure from President Obama to address the Yuan, which many commentators say is undervalued and gives the Chinese an unfair advantage in export markets. The Yuan’s exchange rate has been pegged to that of the US Dollar since July 2008 to shield the Chinese economy from the worst effects of the global economic downturn. However the strength of the Chinese recovery has fueled criticism of this policy.

On Thursday the Chinese Commerce Ministry reaffirmed its opposition to a stronger Yuan, saying that it would do nothing to ease the problem of near double digit US unemployment.

If the Chinese government is successful at keeping growth at a manageable rate, China is likely to overtake Japan as the world’s second biggest economy this year. Li Xiaochao, spokesman for China’s National Bureau of Statistics, told reporters in Beijing that the “momentum of national economic recovery” had further expanded and there was “a good foundation for reaching the targets set for the whole year”.