China continues to grow at a superlative rate despite recent measures to try to slow down the country’s economic growth. The country has increased interest rates marginally, reduced the ease to get credit, and control the expansion in the real estate sector.
Recently, the World Bank raised the GDP estimate for China to 10.4% for this year, well above the previous estimate of 9.5% in May. The World Bank also raised the GDP estimate for 2007 to 9.3% from 8.5%. After reporting a 11.3% growth in the second quarter and given the growth upgrades, it is becoming even clearer that China will need to regulate economic growth or risk causing a climate of inflation.
In other key economic news, China’s July industrial production came in at 16.7% year-over-year, down from a record 19.5% in June but still robust enough to cause some concerns.
The Chinese central bank will need to raise interest rates to make sure the economy does not grow at pace that can cause inflation and bubble-like characteristics.
Raising Chinese interest rates will also help to drive up the value of the yuan against the U.S. dollar, which should help to moderate the climbing U.S. trading deficit with China. China’s July trade surplus was a record for the third straight month coming in at $14.6 billion.
For 2006, estimates call for China’s trade surplus to grow in excess of 50% compared to the surplus of $101.88 billion in 2005. The upward trend in China’s trade surplus will continue to put pressure on the country to increase the value of the yuan. The United States and European Union want this and China will need to address this or we could see more and stiffer retaliation from the United States, which has talked about a potential 27.5% tariff on Chinese goods.
Now the ball is in China’s court and we’ll see what it does. I’m betting on minor upward moves in the yuan and not a change to a flexible exchange rate system.