Export Cash

A flood of cash from overseas sales raises the risk of asset bubbles and bad loans. Exports surged 27.8 percent in the first quarter and pushed the trade surplus to $46.4 billion. The stock market rose to records and had the biggest one-day fall in a decade. Banks made 1.4 trillion yuan of new loans, nearly half the total for 2006.

The central bank raised interest rates once in the quarter and has ordered banks to set aside more money as reserves three times this year to curb lending and investment.

``China's growth has shown clear signs of rebounding in the first two months, mainly on stronger growth in credit, investment and exports,'' said Qu Hongbin, an economist at HSBC Holdings Plc in Hong Kong. ``This raises the question of whether Beijing will slam on the brakes.''

Investment `Curse'

Excessive investment may cause manufacturing overcapacity and deflation, turning a source of growth into a ``curse,'' the Asian Development Bank said last month.

China began to shut inefficient plants and curb investment last year in 11 industries including steel, coal, cement and aluminum, the government says. About 70 percent of 600 consumer goods were in oversupply, a Ministry of Commerce report said.

``The government needs to take proactive tightening measures before bubbles are formed,'' said Ha Jiming, chief economist at China International Capital Corp. in Hong Kong. ``Also, inflation is creeping higher on food, which is a major cost for the poor, and this could cause social unrest.''

Consumer prices probably jumped 2.7 percent in March from a year earlier, compared with the central bank's target of 3 percent for 2007, according to the Bloomberg News survey. That is close to the benchmark one-year lending rate of 2.79 percent, encouraging households to move more money from bank deposits to the stock market.

`Stress Test'

``If the actual CPI inflation exceeds 3 percent, we believe it could be a stress test on the People's Bank of China's comfort zone for inflation,'' said Liang Hong, an economist at Goldman Sachs Group Inc in Hong Kong.

While the government tries to cool lending, companies are bypassing banks to tap the stock market for money. Angang Steel Co., China's third-largest steelmaker by production, plans to sell shares to fund a 22.6 billion yuan steel mill.

China's economy will likely expand a slower 10 percent in the second quarter because of decade-high growth in the same period last year, the economists said. GDP will probably grow at 9.9 percent in 2007, the first deceleration in six years, the survey showed.

Economists at HSBC Holdings Plc, Credit Suisse Group and Goldman Sachs Group Inc raised annual growth forecasts from March as the trade surplus surged.

Growth in India, the world's second fastest-growing major economy, was 8.6 percent in the fourth quarter.

The following table shows economists' estimates for percentage changes in China's gross domestic product in the first and second quarter and in 2007 from a year earlier.