China - Hot, but not overheating (Apr 07)

China’s economy surged ahead in the first quarter with investment, consumption and trade all stronger than expected or (with the exception of consumption) hoped for. As if on cue, March inflation broke through 3%, the highest for two years. But there is little danger of overheating. Core inflation remains low and corporate profits are strong. Nonetheless, concerns remain over excess liquidity – the 50bp increase to reserve requirements announced 29th April won’t be the last. And fears over asset bubbles and the People’s Bank’s desire to appear vigilant over inflation mean we expect interest rate increases this quarter and the next.