China overheating fears spur tightening talk

Pipeline price pressures are also building. Annual factory-gate inflation quickened to 5.4 percent in February from 4.3 percent in January. Economists had forecast 5.2 percent.

Factory output exceeded expectations, expanding 20.7 percent in January and February from year-earlier levels, while retail sales growth of 17.9 percent was just a touch lower than forecast. Both readings marked an acceleration from December.

Only urban investment in fixed assets such as roads and factories slowed from a year earlier, when the government was launching its 4 trillion yuan (US$585 billion) stimulus package.

Still, investment growth of 26.6 percent in January and February beat market forecasts of a 26.0 percent rise.

The statistics office produces a combined figure for the first two months to iron out distortions due to the timing of the Lunar New Year holiday, which varies from year to year.

Economists tied the underlying strength of the economy above all to the ready availability of cheap credit.

Although loan growth halved in February to 700 billion yuan, the total was still high given that it was a holiday-shortened month. And the proceeds of a lot of last year's lending are still on deposit with banks, ready for companies to spend.

Yet not all economists believe major monetary tightening is imminent. They argue that the government remains wary of the fragility of the global recovery, despite strong export data released on Wednesday, and is already slowing its infrastructure spending. Banks have been ordered to scale back lending and rules tightened to deter speculative property buying.

“Beijing has continued to successfully use incremental tightening measures to slow the pace of economic growth back to a more sustainable level from last year's hyper-stimulated rate,” said Andy Rothman with CLSA in Shanghai.

He said more “symbolic” increases in required reserves were likely — there have already been two this year — as well as a couple of small interest rate rises in the second half of 2010.

But more dramatic policy steps to ward off asset price bubbles would not be needed, Rothman said in a note to clients.

Xing Ziqiang, an economist at China International Capital Corp in Beijing, said the central bank would wait and see for another month or two before raising interest rates, while Ting Lu with Bank of America Merrill Lynch said he still did not think borrowing costs would rise until the second half the year.

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