China’s Growth May Exceed 11%, Adding Rate Pressure

China’s economy probably expanded more than 11 percent for a third straight quarter, raising the likelihood of more interest-rate increases to prevent a flood of export cash from fueling asset bubbles.

Gross domestic product expanded 11.5 percent in the three months to Sept. 30 from a year earlier, according to the median estimate of 26 economists surveyed by Bloomberg News, after jumping 11.9 percent in the second quarter. The statistics bureau may release the figures this week.

Slower global demand because of a weaker U.S. economy may curb growth of China’s trade surplus, helping central banker Zhou Xiaochuan tame the wave of liquidity. The nation’s securities regulator last week warned of “great risks” after the stock market added $2.5 trillion in market capitalization this year, almost the equivalent of 2006 GDP.

The government is “stabilizing the liquidity problem rather than solving it,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. “China needs more tightening to address the risk of economic overheating.”

China has been the biggest contributor to global growth this year, the International Monetary Fund says.

Currency Gains

A stronger Chinese currency would make exports more expensive. That would help to curb a trade surplus that has already ballooned to $185.7 billion this year, topping the $177.5 billion record for all of 2006. It would also ease pressure for more monetary tightening after five interest-rate increases this year that pushed the benchmark one-year lending rate to a nine-year high of 7.29 percent.

The yuan has gained about 4 percent versus the U.S. dollar this year.

Zhou told reporters last week that monetary controls so far “haven’t been very effective” and steeper or more frequent rate increases are possible. The People’s Bank of China this month told lenders to set aside 13 percent of deposits as reserves, compared with a 9 percent requirement at the start of the year.

“Time to prick the bubble,” was the heading on a report this month by HSBC Holdings Plc chief China economist Qu Hongbin in Hong Kong that described inflated stock and property prices as the biggest risk to the economy.

The benchmark CSI 300 Index of stocks almost quadrupled in the past year, while house prices in the southern factory city of Shenzhen climbed 21 percent in August from a year earlier.

Bubble Trouble

Letting a bubble grow “only sets the stage for a bigger contraction at some point, which may have disastrous economic and social consequences,” Qu said. The government may sell stakes in state companies to boost the supply of shares and increase taxes on investors, the economist said.

September’s inflation rate was 6.2 percent, down from a 10- year high of 6.5 percent in August, the National Development and Reform Commission said last week. Slower food-price increases were probably the cause.

Full-year inflation may be 4.5 percent, according to Wang Tao, head of economics and strategy for Greater China in Beijing at Bank of America Corp. That’s higher than both the central bank’s target ceiling of 3 percent and the benchmark one-year deposit rate of 3.87 percent.

“The situation is getting worse,” said Yang Hongyi, a 50- year-old driver who works for a transportation company in Beijing. “You can’t really eat less just because food is more expensive, so you end up spending less on other things.”

`Tonic China Needs’

Weaker demand for exports because of a U.S. slowdown may be “exactly the tonic China needs” to reduce the problem of too much money in the financial system, Ben Simpfendorfer, a strategist at Royal Bank of Scotland Plc in Hong Kong, wrote in a report this month.

Economic growth has been at “an excessively high cost to resources and the environment,” President Hu Jintao said last week at the twice-a-decade Communist Party congress in Beijing. Delegates yesterday amended the party charter to reflect Hu’s “Scientific Outlook on Development” doctrine of “putting people first” by narrowing income gaps, fighting corruption, and curbing environmental damage.

China’s rapid expansion of industrial production has raised concerns that it may be left with idle factories and bad loans if demand suddenly slows.

Fixed-asset investment in urban areas probably increased 26.6 percent in the first nine months from a year earlier, according to the economists’ estimates.