China's better-than-expected economic performance in the first quarter may ease the need for looser monetary policy but a strong rebound in exports and domestic demand is needed for a solid recovery, analysts said.

China's gross domestic product rose 6.1 percent from a year earlier to 6.57 trillion yuan (US$939 billion), the weakest growth since 1992, when quarterly figures were first released.

However, economists said GDP and other recently released economic data raise hopes that China's slowdown may be bottoming out.

"Despite the new low in year-on-year GDP growth, data at the end of the first quarter showed renewed strength in production, investment and demand as stimulus efforts kick into higher gear," said Ken Peng, a Citibank economist in Shanghai.

Industrial production in March rebounded to 8.3 percent on a year-on-year basis from 3.8 percent for the first two months, while fixed-asset investment surged 30.3 percent last month and 28.8 percent for the quarter.

Foreign direct investment in March dropped 9.5 percent to US$8.4 billion on a year-on-year basis, compared with a 15.8 percent decline in February and a 32.6 percent tumble in January.

Major lending

"China's economic stimulus package is already paying off with positive changes evident in the economy," Premier Wen Jiabao said on April 18 at the Boao Forum for Asia annual conference.

China has announced a 4-trillion-yuan stimulus package, along with higher rebates on export taxes, a boost in credit and more subsidies for rural economic development.

The central bank, the People's Bank of China, eased monetary policy in November to counter the effects of the global financial crisis.

Since September, the bank has cut interest rates five times and relaxed its reserves requirement four times.

The economy grew 9 percent last year though it tailed off to an annualized 6.8 percent in the final quarter.

Economists said quarter-on-quarter growth in the first three months of this year may have accelerated on a seasonally adjusted basis.

"The March quarter results were reassuring to policy makers so the need for further monetary loosening has eased," said Sherman Chan, a Moody's Economy.com economist.

Chinese banks have heeded government calls to help finance earmarked state projects. They extended 1.89 trillion yuan in local-currency loans in March, bringing the first-quarter total to 4.58 trillion yuan, close to the government's full-year target of at least 5 trillion yuan.

That helped lift annual growth in the broad M2 measure of money supply to a record 25.5 percent in March on a year-on-year basis, up from 20.5 percent in February and easily exceeding economists' expectations of a 21.3 percent rise.

"Credit growth has been strong, and there is little need for the authorities to make the lending environment even more encouraging," said Chan. "Controlling loan defaulting and monitoring a potential return of inflationary pressure may be the new focus of China's financial regulators and central bank from now on."

Economists are concerned the huge supply of credit in the first quarter may translate into a surge of bad loans and they expect authorities to be more prudent on expanding credit.

Fourth-quarter fears

Tommy Xie, an OCBC Bank economist, said the central bank will keep its foreign-exchange and interest-rate policies consistent with first-quarter economic indicators. He expects the Chinese yuan to remain stable for the next few quarters.

"The latest signs of recovery in China's leading economic indicators have limited the possibility of an outright yuan depreciation," Xie said.

On the interest-rate front, the latest pickup in yields on China's bills and bonds suggests less possibility of further easing of interest rates.

Economists, though, caution that rapid economic growth stoked by central-government investment won't be sustainable.

"The best scenario for China is that private investment starts to catch up with public investment in the second half," Xie said.

China's domestic demand is viewed as critical for any rebound in private investment as forecasts for Western economies remain poor.

Some economists expect a U-shaped or even W-shaped recovery in China's economy though some optimists said the first-quarter data are a prelude to a V-shaped recovery in the second quarter.

OCBC's Xie said the risk for the Chinese economy is that growth may slow again in the fourth quarter after picking up in the second and third quarters, if the onus for growth doesn't shift to domestic demand.

Some analysts think China may announce a second stimulus package though that idea lost some steam after the first-quarter data were released.

Xie said he thinks it more important for China to focus on implementing the first stimulus package before a second one is contemplated.

(Shanghai Daily April 27, 2009)