The Chinese economy is growing at a staggering rate, with the first quarter gross domestic product (GDP) increasing 11.1 percent and the trade surplus soaring to $46.44 billion despite a sharp drop in March.

With the first quarter having drawn to an end, the world is left wondering how China has performed in, or rather endured, the three months following the end of its World Trade Organization (WTO) transitional period in December.

To provide a comprehensive overview of first-quarter economic performance, Beijing Review conducted an exclusive interview with Tao Dong, Chief Economist of Credit Suisse First Boston (CSFB), to get his insights into the Chinese economy.

Dealing with a muscular GDP

Gross domestic product, the leading economic index, has gained momentum since the end of 2003, when China joined the WTO. For three years running, China's GDP has climbed steadily. By the end of 2006, China's GDP growth had reached 10.7 percent, while that of 2003 was 9.1 percent.

Tao revised CSFB's forecast for China's 2007 GDP growth up to 11 percent from his previous forecast of 10.4 percent, noting that the economy is reaccelerating and expecting rebounds in fixed asset investments. "This projection is made based on expected [government] restraints and tightening measures later this summer," said Tao.

The Chinese Government has been talking about an 8-percent GDP growth for four years now, but it never comes to fruition. The actual growth rate has exceeded 9 percent with ever-increasing speed year on year. Concerning China's economic performance over the next quarter, Tao said timing is the essence.

"The growth outlook for the second quarter this year depends on when and how Beijing launches the next round of tightening measures," he said. Tao expects two interest rate hikes (54 basic points), as well as another two of the reserve requirement ratio (100 basic points) in the coming months.

According to Tao, these rate hikes are only mild measures. He expects the tightening policy to escalate in mid-year, when the consumer price index (CPI) exceeds 3 percent, as the stock market becomes more speculative, and as bank deposits continue to flee amid negative interest rates. Tao said the ratio would have to jump to 11-11.5 percent in order for Chinese monetary policy to escape the liquidity trap.

Tao said, "We have also revised our year-average CPI forecast to 3.2 percent from 3 percent." But he added, "We assume the domestic A-share stock market and the (uncertainty of) U.S. housing sector are the two biggest risks to our growth forecast this year."

First quarter CPI surged to 2.7 percent, just as experts had predicted. In 2006, the average CPI grew a mild 1.5 percent compared with the 2005 rate. However, CPI growth has increased recently, up 1.9 percent since last November, with its largest surge of 2.8 percent last December.

Turning to 2007, CPI doesn't show signs of cooling down. It jumped 2.2 percent in January and 2.7 percent in February. Experts warn the rapid increase in CPI could possibly lead to inflation, though growth rates below 5 percent are tolerable.

Tao contended that the inflation pressure of the global economy will grow, and central banks of all countries will increase interest rates more often than what is widely suspected.

Investing in the infrastructure

This year, Chinese investment has largely preferred infrastructure rather than its previous favorite of industrial production, said Tao, contending that it is good for the government to focus on infrastructure construction.

Currently, the Chinese Government has committed itself to substantial development projects, including the construction of a "new socialist countryside," the large-scale development of west China, inter-city railway construction and heavy investment in major metropolitan subway networks.

In the first two months of this year, China's fixed asset investment grew 23.4 percent compared with a year earlier and is expected to see further gains. After observing China's strong first-quarter growth, Tao revised CSFB's forecast for fixed asset investment from originally projected 17.5 percent to 23.2 percent.

Chu Jianfang, macroeconomy analyst with China Securities Research Co. Ltd., said that at present, a 23-percent or even possibly a 25-percent growth in fixed asset investment is reasonable, arguing that China is a big country and that dedication to infrastructure is for the benefit of the people.

Growing investment has triggered rapid bank loan increases. According to statistics from the People's Bank of China, financial institutions loaned about 1.42 trillion yuan ($1=7.73 yuan) in the first quarter, up 13.4 percent compared with the same period last year.

While banks increased their loan-giving pace, deposit growth rate slowed in the first quarter.

"As a matter of fact, China is undergoing negative interest rates," said Tao. "The bank deposits have constantly flown out of the banks and into the stock market and the real estate market." Currently, it is widely believed that investing in the stock market and the property market will bring more profit than waiting on bank interest, despite potential risks in the two markets.

Due to this, Tao assumed that the property market will be hot as even, but this projection is subject to policy changes.

Statistics from China Securities Depository and Clearing Corp. Ltd. show that by the end of April 13, total accounts in the Shanghai and Shenzhen stock markets had reached 89.2407 million, with 140,000 new accounts being opened each day.

In the first quarter, over 5.01 million new accounts were opened in China's stock markets. New accounts for all of last year were a mere 3.0835 million.

Also in the first quarter, paid-in foreign direct investments (FDI) rose 11.56 percent year on year despite a corporate income tax readjustment that had been assumed to pose a burden on foreign-funded companies. FDI grew all of 4.5 percent last year. Tao contended that FDI flow into China will increase in spite of tax policy changes, as China has become a world factory. Other emerging countries like India and Viet Nam will siphon off some FDI but won't pose a big threat to China, because of its cheap labor costs and relatively low land prices.