China Says Its Economy Grew by in With Little Inflation

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					China Says Its Economy Grew by
10.7% in 2006, With Little Inflation

A fruit stand in Shanghai. Inflation, driven largely by higher food prices, jumped to
2.8 percent in December, from 1.9 percent in November, but analysts say they are not
overly concerned about inflationary pressure.

SHANGHAI, Jan. 25 — In the last 30 years, no major economy in the world has
grown at the speed of China’s, and no other country has been able to do it year after
year, for over a decade.

And on Thursday China did it again, saying that its economy grew by a whopping
10.7 percent in 2006, the fastest pace in more than a decade, with only modest signs
of inflation.

“This is pretty impressive,” said Shen Minggao, an economist in Beijing for Citigroup.
“I’d say 2006 was about the best year in a decade — fast growth and low inflation.”

The 10.7 percent growth recorded in 2006 was the fourth consecutive year of
double-digit economic growth and China’s strongest year since 1995, when the
economy grew 10.9 percent.

The economic miracle — fueled by soaring exports and huge investments in buildings,
roads and cities — goes on even in the face of frequent warnings from government
officials and private specialists about asset bubbles, excessive bank lending and an
overheating economy.
“Right now, the economy is growing at the upper limits of what is acceptable,” said
Li Lianfa, an economist at Peking University. “The government is facing a lot of

Chief among them are balancing the supersize growth and heavy investment, and
trying to distribute the riches as evenly as possible.

Analysts say the government is determined to keep the economy revving, but is also
wants to prevent anything from spoiling the party before 2008, when Beijing is to
play host to the Olympic Games.

To help cool the economy, Beijing has raised interest rates and pressured banks to
temper lending, with some results. Fixed-asset investment slowed in the latter part of
last year, for instance, and economic growth in the last months of 2006 slowed from a
feverish second-quarter pace of 11.5 percent.

Many economists are now forecasting that Beijing will take additional steps, possibly
raising interest rates again early this year.

Beijing is also under pressure to allow the Chinese currency, the yuan or renminbi, to
appreciate more quickly against the dollar, in the hope of easing the country’s trade
surplus with the United States.

The yuan has strengthened somewhat against the dollar, climbing to about 7.8 yuan to
the dollar, from 8.26 yuan in 2005.

Economists have warned that if the yuan does not continue to appreciate against the
dollar and other major currencies, China could face protectionist action, which could
pose an even more serious threat to economic growth.

These are the trials of a country where everything is red hot — foreign investment,
trade, real estate and stock prices, which climbed more than 130 percent last year and
have soared even higher in the opening weeks of this year.

Although inflation, driven largely by higher food prices, jumped to 2.8 percent in
December, from 1.9 percent in November, analysts say they are not overly concerned
about inflationary pressure. The core inflation number, excluding volatile items like
food, was modest, with inflation rising just 1.5 percent in 2006.

But other economists say that accelerated growth often leads to higher prices, and that
there could be a lag before stronger signs of inflationary pressure are seen.

Among the government’s chief worries has been overinvestment in certain sectors of
the economy, like real estate. Stock prices are another concern. After dipping to their
lowest level in six years in mid-2005, stock prices in Shanghai have nearly tripled in a
record-breaking run.

The central bank said that last October, for the first time in five years, the bank
savings of Chinese citizens slid from the month before as more money went into the
stock market. An abrupt change in the market, analysts say, could create havoc.

While the stock run-up means that Chinese companies can once again raise money
with stock offerings in the domestic market rather than relying on the Hong Kong
stock market, huge risks remain. Analysts have long derided the Chinese market as a
gambling den crowded with companies using suspect accounting.

In yet another effort to tame the economy, the government raised the banking reserve
requirement ratio last month, to help restrict lending. And several economists say they
expect interest rate increases in the coming months.

But not all specialists share the view that China’s booming economy is in any
jeopardy. One such contrarian is Jonathan Anderson, an economist at UBS, who says
his firm’s internal figures show that China’s economic growth has actually moderated
over the last few years. Those figures show that the Chinese economy was growing
even faster, at closer to 12 percent, not the 10 percent the government reported.

So the new numbers, he says, are not so alarming.

“This really shouldn’t be an issue for the authorities,” he said. “What you’re seeing is
a very stable economic situation with very little inflation.”

Discussing the following questions based on the article above:

1. The article states growth in the export sector has been one factor contributing to
overall growth. How would we represent growth in the export sector and how is it
predicted to affect the terms of trade?

2. The article states China could face protectionist policies, say tariffs, from other
countries. How are protectionist policies predicted to affect China's terms of trade?

3. How are protectionist policies from other countries predicted to affect China's
relative supply and relative demand?   Hint: draw a relative supply-relative
demand diagram to help you with the logic.

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