China's GDP Grows 10.6%; Bank Reserve Ratio Rises

April 16 (Bloomberg) -- China's economy grew 10.6 percent, faster than estimated, and inflation was close to the quickest in 11 years, prompting the government to order banks to set aside more money to slow lending.

Gross domestic product for the first quarter grew more than the 10.4 percent median estimate of 24 economists surveyed by Bloomberg News. Consumer prices climbed 8.3 percent in March, the statistics bureau said today in Beijing.

As the U.S. economy falters, policy makers in China, the biggest contributor to global growth, still regard inflation and overheating as bigger threats than a slowdown. The central bank raised the proportion of deposits that lenders must set aside as reserves to a record 16 percent to cool an economy that has grown more than 10 percent for nine straight quarters.

``The central bank moved so soon after the GDP data as a gesture to show that they're taking inflation seriously,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. Wang said the central bank may order increases in the reserve ratio ``every two or three months.''

Reserve requirements will rise 50 basis points from April 25, the third increase this year, the People's Bank of China said today on its Web site. Within an hour of the announcement, Premier Wen Jiabao said in a statement that inflation is China's biggest problem.

Currency Gains

The yuan closed at 6.9918 versus the dollar in Shanghai from 6.9973 before the economic data was released. The currency has gained more than 4 percent this year, compared with a 7 percent increase in 2007, reducing import costs and aiding efforts to reduce the trade surplus.

Inflation climbed to 8.7 percent in February, the highest rate since May 1996. China's foreign-exchange reserves, the world's largest, rose to $1.68 trillion at the end of March.

While first-quarter economic growth slowed from 11.2 percent in the previous three months, combating inflation and preventing overheating remain the government's most important tasks and a ``tight'' monetary policy will continue, said Li Xiaochao, the statistics bureau spokesman.

``Small-scale hikes to the reserve ratio requirement are not sufficient to control monetary expansion and inflation,'' said Liang Hong, a senior economist at Goldman Sachs Group Inc. in Hong Kong. She expects faster currency gains, interest-rate increases, higher reserve requirements and orders to banks to limit lending.

Borrowing Costs

There's still room for interest rates and the yuan to rise, central bank Governor Zhou Xiaochuan said this week.

The CSI 300 Index of shares fell 2.5 percent to close at a one-year low, extending its decline this year to 35 percent. Investors are concerned the government will screw monetary policy too tight after interest rates rose six times last year.

``Economic growth is still very strong and inflation is out of control,'' said Jim Walker, chief economist at Asianomics Ltd. in Hong Kong. ``The authorities will need to raise interest rates a lot more and let the yuan appreciate.''

Some economists argue that China will avoid raising the key one-year lending and deposit rates from 7.47 percent and 4.14 percent to avoid attracting money from abroad.

``The reserve ratio requirement has taken center stage as a monetary policy tool, as further interest rate hikes would attract hot money inflows,'' Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong, said today.

Food Prices

Soaring food costs hurt the 300 million people in China estimated by the World Bank to be living in poverty. The central bank said last month that a survey showed 49 percent of households viewed inflation as ``too high to bear.''

China is facing ``great'' inflationary pressures in 2008, said Li, citing raw-material, labor and commodity costs and the ``lagging effect'' of price increases last year.

JPMorgan today forecast China's economy will grow 10.5 percent this year, up from an estimate of 10.3 percent previously. Goldman Sachs also forecast 10.5 percent growth, an increase from a 10 percent prediction.

First-quarter growth slowed as the worst snowstorms in 50 years closed factories, destroyed crops and delayed shipments, and U.S. demand for exports weakened. The trade surplus narrowed from a year earlier for the first time since 2004 and export growth slowed.

Urban disposable incomes climbed 11.5 percent in the first quarter from a year earlier to 4,386 yuan ($627), the statistics bureau said. Rural earnings rose 18.5 percent to 1,494 yuan.

Factory and property spending in urban areas grew 25.9 percent in the first three months from a year earlier after a 24.3 percent increase in January and February combined. Retail sales climbed 21.5 percent last month, the fastest pace since at least 1999, when Bloomberg data began.

China's economy, which may overtake Germany's as the world's third biggest this year, has averaged 10 percent annual growth and expanded 68 times in size since free-market reforms started in 1978. The nation's appetite for imports is helping Asia to weather the U.S. slump.