Remember last week when I told you that China is the world’s third largest economy? Well, scratch that. A report just released today showed that China grew 10.7% during the final quarter of 2009, overtaking Japan as the second largest economy on the planet. On a yearly basis, China was able to expand 8.7%.
Looking beyond the country’s GDP, there is a slew of other economic data that supports this new ranking. While industrial productions in major economies have been dropping, China managed to report an 18.5% year-on-year increase on December. Retail sales have consistently treaded the double-digits, with the most recent one showing a 17.5% climb in sales.
Now, if you think 8.7% annual GDP growth is amazing, here’s a newsflash: China isn’t happy with it. Mama used to say “Too much of a good thing is bad for ya.” The recent developments show that China isn’t excluded from this.
The country now runs the risk of overheating because of growing way too fast. Three quarters of accelerating economic growth increases the risk that inflation could surge out of control which eventually could lead to asset price bubbles. I took a look at consumer prices in December 2009, and what did I find out? Prices have already climbed by an annualized rate of 1.9%!
To keep inflation in check, Chinese policymakers are now scrambling to mop up the excess liquidity in their financial markets. Bank lending, which was more than 95% higher than a year earlier, is pushing asset prices higher, particularly in the housing industry. Since China doesn’t want the housing bubble to burst like it did in the US, policymakers are now focusing on three goals: to manage credit growth, to counter speculations on property prices, and to curb inflation.