China's banks help push growth to fresh highs

China is only one of top 10 economies to be growing
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Prompting hopes that it could prove the locomotive to drag the rest of the world out of recession, the official Chinese statistical agency said yesterday that China's economy grew at the surprisingly strong annual rate of 7.9 per cent in the second quarter, compared with the same months in 2008. The equivalent figure in the first quarter was 6.1 per cent – a 19-year low.

On an annualised basis the Chinese growth rate between April and June stands at over 16 per cent – way above even the norms seen in the boom years.

The figures suggest that the emerging economic superpower is well on track to fulfil Beijing's official growth target of 8 per cent for 2009, and international forecasters are backing the government's claims. In its most recent survey the OECD predicted growth of 7.7 per cent this year; the IMF has raised its estimate to 7.5 per cent. China's is the only one of the world's 10 largest economies to be growing.

In contrast to her Western counterparts, China's authorities have had little difficulty to persuading their banks to lend. Still controlled by the Communist Party, it is the provincial banks that have been taking the lead in the latest lending boom, their commercial targets intimately linked to political objectives set by local governors anxious to please Beijing. Taken together, China's banks have lent more so far this year than in the whole of 2008.

Qu Hongbin, China economist at HSBC, commented: "The top policy-makers are reiterating the stability and continuity of macroeconomic policy. We do not expect any meaningful changes in monetary policy in the next 12 months, though the surprise in new lending may invite some 'fine-tuning' of credit policy."

The government's fiscal boost of $500bn (£304bn) and aggressive monetary easing have prompted a boom in investment and in the stock market – the benchmark Shanghai Composite Index has jumped by 75 per cent since the start of the year. A return of "risk appetite" in the West and a growing belief that the Chinese yuan will be revalued has boosted inflows and left China's foreign currency reserves at $2.1 trillion in the last quarter.

As is usual in China, much of the government's money has been directed towards infrastructure projects that have benefited heavy industry.

Thus, although Beijing is demonstrating some sensitivity to Western demands that she reorientate her economy away from exports and towards domestic demand, there seems less urgency to tilt the economy from its investment bias towards consumption. There is little sign as yet that the Chinese consumer is emerging as a force to replace their (no longer) free-spending American and European counterparts.