April 22, 2009: 6:09 AM ET
BEIJING (Reuters) -- China's central bank on Wednesday declared the economy to be on the road to recovery as Goldman Sachs joined a rush to upgrade growth forecasts on the back of aggressive government efforts to boost investment.
China's gross domestic product growth in the first quarter slowed to 6.1% from a year earlier, the lowest rate on record, from 6.8% in the final three months of 2008.
But Yi Gang, a vice governor of the People's Bank of China, expressed confidence that expansion for the whole year would turn out to be close to the official target of 8%.
"In terms of quarter-on-quarter data, actually the fourth quarter of last year was the bottom of this cycle in terms of industrial output, electricity use, transportation and so on and so forth," Yi told the annual meeting of the International Swaps and Derivatives Association.
As well as rolling out a 4 trillion yuan ($585 billion) two-year stimulus package, Beijing has successfully prompted state-owned banks to turn on the lending taps.
New loans in the first quarter totaled 4.58 trillion yuan after a record leap of 1.89 trillion yuan ($276.6 billion) in March alone.
Yi said the surge in lending had helped to quash deflationary expectations and to stabilize China's property and equity markets. It had prompted companies to speed up restocking and, more importantly, it had helped restore confidence.
The upshot had been some positive signs of recovery.
"The economy is going forward as the stimulus package started working. And looking into the future, the second quarter and the remainder of this year will continue this recovery trend," said Yi, who was speaking in English.
Bullish Goldman
Goldman Sachs on Wednesday became the latest bank to take a rosier view of prospects for the world's third-largest economy.
Goldman marked up its projection for GDP growth this year to 8.3% from 6% and stuck its neck out with a forecast for 2010 of 10.9%, up from 9%.
"We acknowledge that policy stimulus has been more determined and persistent and the response from domestic demand has come in earlier and more strongly than we envisaged previously," Goldman economists Helen Qiao and Yu Song said in a report.
UBS, Royal Bank of Scotland and Barclays Capital all raised their forecasts after last Thursday's first-quarter GDP figures and accompanying data for March, which showed a marked pick-up in growth in industrial output and fixed-asset investment.
By contrast, Standard Chartered Bank on Wednesday reiterated its forecast of 6.8% growth this year, while a senior official said the foundations of China's recovery were shaky.
Lou Qinjian, deputy minister of industry and information technology, said overcapacity, including in the steel and auto sectors, was intensifying due to weak domestic and global demand.
"We can not easily conclude that the economy has bottomed out. The industrial situation remains serious," he told a forum.
Loan growth worries
Some economists are concerned that the jump in lending will add to the excess capacity that worries Lou, eventually saddling China's banks with a new crop of bad loans.
Wu Xiaoling, a former PBOC vice governor, told Reuters the lending surge would be no good for the economy if it continued.
Speaking on the sidelines of the conference, she urged banks to recognize the risks they are taking and to apply the brakes.
Yi said: "We realize the negative side and possible risks, but overall it's a positive development. For the remainder of this year, I hope that lending will stabilize at a sustainable rate. That is the best scenario."
Media reports of an outright decline in bank lending in early April weighed on the Shanghai stock market, which dropped 2.9%, the second-steepest fall in six weeks.
Paris-based Michala Marcussen, head of strategy and economic research at Societe Generale's asset management unit, said she shared concerns about a possible rise in sour loans and fretted that part of the 35% rally in Shanghai stocks so far this year had been fueled by breakneck credit growth.
"Having said that, I also believe Chinese equity market is attractively priced and I still believe that to be the case," Marcussen told reporters in Singapore.
Yi said Beijing was comfortable about a slowdown in the pace at which it is accumulating foreign exchange reserves, which grew just $7.7 billion in the first quarter to $1.9537 trillion. In all of 2008 the stockpile increased $417.8 billion.
"We have a 'take it easy' attitude. We already have enough reserves," Yi said. "We hope it will stabilize and that in the future we will have more or less balanced payments."
Yi said China, as a large holder of dollars, sees itself as a responsible long-term investor, not a short-term speculator. As such its reserve management policy follows the principles of safety, liquidity and investment returns, in that order.
China is of course concerned about the outlook for the dollar and hopes the policies of the government in Washington and of the Federal Reserve will stabilize the U.S. currency, Yi said.
