Borrowing costs expected to rise as economy surges faster than expected

BEIJING - China's faster-than-estimated economic growth has raised investors' speculation that the monetary authority will boost borrowing costs. Their tightening concerns dragged the Shanghai Composite Index down 2.7 percent last week.

Friday's 1.4 percent rebound saved the gauge from the lowest level in four months, after the central bank raised the reserve-requirement ratio (RRR) for lenders. However, the sustained high inflation and the "hot" economy may push the government to further tighten monetary policy, said analysts.

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Although the country's inflation slowed to a year-on-year rise of 4.6 percent in December, from a 28-month high of 5.1 percent in November, the increase in salary and production costs as well as the excess liquidity will keep the consumer price index (CPI) at a high level, said Sun Chi, a macro-economic analyst from Nomura International Limited in Hong Kong.

Stabilized food prices contributed to the CPI drop with food-price inflation declining to 9.6 percent in December from 11.7 percent in November, Wang Qian, a senior economist from JPMorgan Chase Bank said on Friday.

"Consumer-price growth is expected to be quickened in January, boosted by the consumption binge for the coming holidays. China's CPI may hit a peak in the middle of 2011," said Wang.

In 2010, China's gross domestic product (GDP) jumped at the fastest pace in three years, a 10.3 percent growth year-on-year, to 39.8 trillion yuan ($6.04 trillion), boosted by a 9.8 percent expansion in the last quarter, according to the National Bureau of Statistics.

In order to shift focus from GDP figures to economic restructuring and the raising of ordinary people's living standards, local governments, including Shenzhen in Guangdong province and Shijiazhuang in Hebei province, planned to slow down their GDP and focus on economic restructuring this year, senior officials said at a China Center for International Economic Exchanges forum.

JPMorgan said there may be two more hikes of RRR and three hikes of interest rates this year to cool down the emerging economy. The bank also predicted a 9.6 percent growth in China's GDP in 2011.

"The excess liquidity will make the government tighten supervision on overseas capital inflows and outflows," said Wang Jun, a macro-economic analyst from Guotai Junan Securities. He said China's M2 growth of 19.7 percent in December was still higher than the "healthy" growth rate from 15 to 17 percent.

Wang said that China's stocks will not slump too much in the first quarter because current stock valuations have been driven to 12.5 times estimated earnings, close to the weakest in two years.