VINACHEM

GUANGZHOU (ICIS)--China’s economy expanded at an annual rate of 9.7% in the March quarter, slowing further from the 9.8% pace recorded in the fourth quarter of 2010, as the country continued to tighten its monetary policy to curb inflation, according to official statistics released on Friday.

Inflation in the world’s second-biggest economy hit a 32-month high of 5.4% in March, according to official data released by the National Bureau of Statistics (NBS).

“China, at this moment, actually needs to slow down its growth to contain inflation,” said Wang Hu, an analyst at Shanghai-based brokerage firm Guotai Junan Securities (GTJA). China’s average GDP growth last year was 10.3%.

The People’s Bank of China (PBoC) implemented two policy rate hikes so far this year to mop up excess liquidity in its financial system that is causing strong inflationary pressures. It also raised the banks' reserve requirement ratio twice since the start of the year.

In 2010, PBoC raised the banks’ reserve requirement ratio, the portion of deposit that must be parked with the central bank, six times and implemented a policy rate hike in October - the first after keeping interest rates steady for nearly three years, to control release of loans following a lending binge in 2009.

Early this week, 24 chambers of commerce under the government-backed All-China Federation of Industry and Commerce (ACFIC) jointly issued a call to stabilise prices of consumer goods.

The agriculture, fishery, pharmaceuticals, property, paper and textiles industries are all represented in ACFIC.

“The effects of those measures will be seen two to three months later and we expect inflation to ease by the third quarter,” said Qiu Yaxuan, chief economist at Shenzhen-based brokerage China Merchants Securities.

China’s inflation is forecast to spike to an average 4.6% this year, sharply higher than the 3.3% average in 2010, before easing to 4.2% in 2012 as commodity prices level off, according to the Asian Development Bank (ADB).

“Industrial growth and investment are already contracting and once the economy cools down, prices would lose its driving force,” said Qiu of China Merchants Securities.

Analysts said that China might further hike interest rates in the second or third quarter to soak up excess liquidity.

“There won’t be any foreseeable problems for the Chinese economy and growth will continue,” said Wang of the GTJA.

ADB forecasts China’s economy to grow 9.5% this year and 9.2% in 2012, with fixed asset investment as a key driver of growth. The expected deceleration in expansion rate is in line with the withdrawal of the fiscal stimulus measures adopted in 2009.