Economists React: China\'s GDP Accelerator Is Working But What About The Brake

China's government said its economy's rebound remains uneven and unstable, even as a surge in growth has prompted economists to debate whether officials need to start cooling things down. 
The government's eight-month-old stimulus program helped boost China's gross domestic product growth to 7.9% in the second quarter, the National Bureau of Statistics reported Thursday, up from 6.1% in the first quarter.   
But Li Xiaochao, a spokesman for the bureau, said the effects of the upturn haven't been felt by all parts of the economy. 'Most people feel there has already been a recovery, but it's uneven and there may be some companies, some areas, some groups that have not yet felt a recovery,' Mr. Li said.
Some economists are urging Beijing to fine-tune its expansionary policies to lower the risks of asset-price bubbles and inflation. But Mr. Li noted that prices are still declining and that many industries are faced with excess capacity. 'Total demand is still insufficient, and economic growth is below its potential rate,' he said.   
China's consumer price index fell 1.7% in June from a year earlier, the fifth straight monthly decline, while the producer price index fell 7.8%, the seventh straight monthly drop. Concerns about deflation, as well as continued worries about unemployment, are likely to keep pressure on the government to continue stimulus efforts. 
Reuters
   
'The challenge for policy makers is that they should be careful not to return to a tightening bias any time soon,' said Wang Qing, an economist with Morgan Stanley. 'This is a crisis and you need a strong policy to deliver growth.'   
Some economists also remain concerned about private businesses' continued reluctance to invest, especially as industrial profits continue to fall. But the increasing evidence that the worst of the slowdown is over for China is fueling debate about the proper course for policy in coming months.
Value-added industrial output, the key measure of manufacturing activity, rose 10.7% in June from a year earlier. That compares to growth of just 3.8% in January and February. The expansion in fixed-asset investment -- money poured into itemssuch as plants and real estate -- in urban areas rose 33.6% in the first half of the year from a year ago, as the government ramped up new projects.   
'Now that government efforts to boost growth have started to work, we are likely to see increased uncertainty and disagreement in official circles about when is the appropriate time to reverse course and withdraw policy stimulus,' said RBC Capital Markets in a note. RBC Capital Markets   
Also Thursday, the finance and economic committee of the National People's Congress, China's legislature, warned that the government must prevent the 'extraordinary growth' of credit that could lead to inflation risks and problems for the financial system. It said China should strengthen credit checks and prevent a rebound in bad loans. The committee includes influential members but doesn't have a role in setting economic policy.
   
The People's Bank of China has already started to take some measures to fine-tune the rapid flow of credit. On Thursday, the central bank used its weekly sale of three-month bills to continue to guide money-market interest rates higher for the third straight week.   
'The balance of risks is slowly shifting away from growth toward inflation,' said Tim Condon, an economist at ING Financial Markets. He predicted the central bank will reduce the amount of monetary accommodation in small steps.   
Mr. Condon said China's GDP will likely grow 8.3% this year and nearly 10% in 2010, and the central bank is unlikely to raise interest rates until the first quarter of next year.
   
Mr. Li, of the statistics bureau, repeated the government's current policy line, saying it will stick to its expansionary fiscal and monetary policies. He said the government will take more measures to improve the sustainability and quality of economic growth, and said increased social spending is supporting incomes.   
China's retail sales in June rose 15% from a year earlier, in line with May's 15.2% growth. Although retail sales are an imperfect barometer of private consumption because they include government purchases, the data nevertheless suggest private consumption demand remains steady for now.   
The benchmark Shanghai Composite Index ended down 0.2% Thursday at 3183.74, reversing gains of as much as 1% earlier in the day, while the Shanghai Stock Exchange government bond index was mostly flat at 121.08 when trading ended.