China Data Show Moderating Stimulus

By TERENCE POON And ANDREW BATSON

BEIJING -- The rapid growth in China's bank lending and investment spending slowed in February, official data issued Thursday show, a sign that the government's gradual withdrawal of stimulus policies in recent months is starting to have an effect on the real economy.

Fixed-asset investment in urban areas, China's main barometer of capital spending, rose 26.6% in the January-February period from a year earlier, according to data from the National Bureau of Statistics. That's the slowest growth rate in a year, and down from the 30.5% expansion for all of 2009, reflecting the shift in priorities for this year. Premier Wen Jiabao said in his annual work report last week that "the launching of new projects must be strictly controlled" this year.

Banks extended 700.1 billion yuan ($102.6 billion) worth of new local-currency loans in February, around half the 1.39 trillion yuan in January and well below the 1.07 trillion yuan in the same month last year, according to data from the People's Bank of China, which has said it will work to gradually normalize monetary conditions this year.

Growth in outstanding loans eased to 27.2% at the end of February from 29.3% in January, also the slowest growth rate in a year.

Although China's top leaders have repeatedly said they are still committed to supporting growth amid uncertain prospects for the global economy, worries about a buildup of inflation and possible asset bubbles have led them to dial back the intensity of the stimulus since late 2009. Officials have restricted the funds available to banks for lending and have slowed government spending on public-works projects.

"Beijing has continued to successfully use incremental tightening measures to slow the pace of economic growth back to a more sustainable level from last year's hyperstimulated rate," said Andy Rothman, China strategist for brokerage firm CLSA, in a research note.

Citigroup economist Shen Minggao said last year's fast credit growth and the export rebound have tempered the impact of policy changes. "But their impact will become more marked in the second and third quarters, as export growth slows on the weakening momentum in U.S. restocking and as credit tightens," he said, adding investment and import growth could slow.

Confirming the stricter trend on new investments, China's Ministry of Land and Resources published rules Wednesday requiring developers purchasing land from local governments to put up a down payment of at least 50%, up from 20% to 30% previously.

Still, economists continued to sound warnings about inflation pressures as Thursday's data showed the economy is still recovering steadily and urged Beijing to further unwind stimulus.

Industrial production during the first two months of the year expanded 20.7% from a year earlier, picking up from an 18.5% rise in December, though the strong numbers also reflect a low base of comparison. Industrial activity in China didn't decisively pick up from the financial crisis until May.

Meanwhile, the consumer price index, the nation's key inflation gauge, in February rose 2.7% from a year earlier, the fastest rise in more than a year and quickening from January's 1.5% rise. The Lunar New Year holidays, which fell in February this year and January last year, lifted the latest CPI number as people spent more on food and travel during the holidays, which tends to drive up prices.

The CPI in the first two months of the year rose 2.1% from a year earlier, faster than December's 1.9% rise, indicating a mild increase in inflation pressures. Ex-factory prices, as measured by the producer price index, in January and February rose 4.9% from a year earlier, up from December's 1.7% rise.

Despite the inflation and output uptick, statistics bureau spokesman Sheng Laiyun said "prices should be moderate and controllable this year," kept in check by a good grain harvest and excess industrial capacity. "There are still no obvious signs of overheating," he added.

In a research note Thursday, Goldman Sachs economists Song Yu and Helen Qiao nonetheless called for more policy shifts. "We believe more decisive policy-tightening measures than those that have been implemented so far … are needed to prevent the economy from overheating," they added. Beijing has raised the share of deposits banks must keep in reserve twice this year and pressed banks to slow lending.
—Liu Li and Joy C. Shaw contributed to this article.