The preliminary official estimate from China’s National Bureau of Statistics released last week showed that China’s economy grew at the fastest pace in nearly three years in the first quarter. GDP jumped nearly 12 percent year-on-year, further highlighting China’s remarkable recovery. Foreign trade was up 44 percent compared to last year, and retail sales were up 18 percent, thanks to fast rising personal income and also showing the effectiveness of Beijing’s initiative to stimulate domestic consumption. Several banks and the IMF have upgraded their GDP growth forecasts for China, all predicting between 10 and 11 percent growth for 2010.

 

Now that China has left the recession in the rearview mirror, the market participants are concerned it's accelerating too fast. The biggest subject of China’s bubble talk has been real estate. Despite tightening efforts by China’s central bank in recent months, prices continue to skyrocket. In March, real estate prices in 70 urban areas jumped a record 11.7 percent compared to a year ago.

In trading today, the two major Chinese stock indices both declined in response to an official media outlet’s report that some banks have been ordered by authorities to cease lending for the rest of January. This claim was denied by China’s top bank regulator, Liu Minkang. He did say today at the Asia Financial Forum held in Hong Kong that the country's overall credit growth would be restricted to 7.5 trillion yuan in 2010 (compared to last year's record 9.59 trillion yuan) – confirming concerns about lending restrictions on the banks. A separate media report said interest rates will be raised on Friday. China’s central bank had already raised banks’ reserve ratio by 0.5 percentage points last week, and investors fear that all these moves will put the brakes on the country’s growth momentum.

 

However, rather than stopping growth cold in its tracks, these tightening measures are meant to tamper growth to prevent overheating. It is also a good sign of robust Chinese economic strength and shows the Chinese government is proactive. If regulators sat on their hands while liquidity continued to increase unchecked, China could very well develop the massive bubbles some analysts had called for.

 

In a government conference this week, Premier Wen Jiabao confirmed China’s stance to enhance governmental macro-economic control to balance stable growth with contained inflation.

The minutes of the latest Federal Reserve Open Market Committee released yesterday gave us some prospective on what the Fed really thinks about long-reaching consequences of the ultra-low rates policy. “Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period,” is one quote that springs off the page.

 

This “negative effect” is inflation. From a policy-making point of view, the way to fight it is via higher interest rates. However, we aren’t likely to see the higher rates in the U.S any time soon as the recovery is still very fragile.

 

Meanwhile, record-setting gold prices signal that inflation is a strong possibility. So do the prices of industrial metals, which have been rising at record pace.

Many economies across the globe aren’t in a hurry to raise rate either. Some are still cutting – the Russian central bank, for example. Beside the goal of stimulating its economy, Russia is also planning to slow down the inflow of capital into the country, which threatens the ruble’s stability. This week, Russia cut a key rate for the ninth time since April to a record low 9 percent to stem the use of the ruble to profit from the carry trade (borrowing in another currency with low rates—such as the U.S. dollar and using the proceeds to buy rubles).

China’s economy is on a roll. The latest data for October shows that the country’s industrial production and trade surplus grew robustly, indicating that its recovery is picking up even more steam. Industrial output grew 16.1 percent on a year-on-year basis, the sixth straight month of accelerating growth. Through the first 10 months of the year, China’s industrial production has increased 9.4 percent compared to 2008, including growth in all industrial sectors. Meanwhile, the country’s trade surplus nearly doubled to $24 billion sequentially from September as exports continued to pick up.

 

But its not just exports driving China’s growth. Retail sales in October more than 16 percent better than 12 months ago. Auto sales, in particularly, jumped 72 percent year-on-year, thanks to government backing.

 

The world’s third largest economy has so far avoided inflation, despite a tremendous growth in its money supply. The country’s consumer price index, according to the state’s official statistics bureau, fell 1.1 percent (on an annual basis) through the first 10 months of 2009.

 

While banks have lent record amounts of money by far this year, the sum of new consumer loans in the month was also nearly halved on a sequential monthly basis.