China Continues to Sizzle But Don’t Worry About Inflation

China surprised with its first quarter GDP number- coming in at 11.1% when consensus had been at 10.4%. The Chinese government had been trying to “cool” the economy in the last several months, including hiking interest rates at least once.

They are failing.

Economists should have been noticing the trend in commodities the past several months- which was nearly straight up. Only if the Chinese economy was still hot could copper rise nearly 50% in that time period.

There is no sign of it abating.

The Chinese CPI was also hotter than expected. It came in at 3.3% for March, which was above the “comfort zone” of 3.0%. In 2006, it was only 1.5%.

But apparently, if you strip out food and energy things don’t look too bad (where have we heard that before?). From CBSMarketwatch:

“It’s above the comfort range, but as far as we can tell it is mainly driven by food prices and international commodity trends, rather than anything specifically Chinese,” Morgan said of the latest CPI.

You might think that 11% growth would be welcomed, but it is certainly near the overheating number. A country can only grow so fast before some structural strains begin to show (shortages in supplies, shortages in workers, price inflation etc.). From Forbes:

“If this type of fast growth continues, there is the possibility of shifting from fast growth to overheating. There is that risk,” Li Xiaochao, spokesman for the National Bureau of Statistics, told a news conference.

How do they contain the growth? The consensus is that they will move to immediately raise interest rates. From Forbes:

A statement posted on the council’s Web site following a meeting chaired by Premier Wen Jiabao said the government will work to “reduce the country’s large trade surplus, limit rapid growth in house prices and maintain basic price stability.”

Beijing has already raised interest rates three times in the past year and imposed investment curbs on real estate, the auto industry and other fields.

Li, the bureau spokesman, said the government will take “appropriate” macro-adjustments. He also said first-quarter investment in real estate development was up 26.9 percent over the same period last year.

The sizzle!

Want to know why copper is in short supply even though the U.S. housing market is tanking? China is a building machine.

It is also why US multi-national companies, who do a large portion of their business overseas now, are thriving even when the US economy appears to be slowing. For American companies like Coach, Yum Brands, Starbucks and McDonalds- the opportunities are still there for the taking.

Watch for great quarterly numbers from those doing business in China. And watch for everyone else to soon be trying to get into Shanghai.