By Andy Mukherjee (Bloomberg)
Updated: 2007-04-23 08:45

China's recent economic growth figure should have been a "buy" signal for the equity markets.

Instead, it caused an Asia-wide sell-off.

The Morgan Stanley Capital International Asia-Pacific Index dropped 1.6 percent on April 19 after the statistics bureau in Beijing announced first-quarter gross domestic product expanded 11.1 percent from a year earlier.

The acceleration from 10.4 percent growth in the previous three months raised concerns that the authorities would tighten the monetary screws more than investors had anticipated.

Yet, most economists haven't changed their views about what they expect the central bank to do this year.

Bank of East Asia Ltd. had predicted three increases in the benchmark lending rates even before the GDP announcement. According to the latest Bloomberg survey, it's sticking to the forecast. Royal Bank of Scotland Group Plc had anticipated two rounds of liquidity tightening through an increase in the reserve-requirement ratio. It, too, is standing pat.

What has changed is that economists are now expecting China's economic growth to be significantly higher than they had previously envisaged for the rest of this year.

The median forecast is now for 10.4 percent growth in 2007, up from an estimate of 9.9 percent just a few days ago.

What that means is simple.

Yes, the Chinese economy may grow faster than previously expected this year. And no, that extra growth won't be snuffed out by a more aggressive monetary policy than has already been discounted by the market.

Good for Markets

That's good news for equities and commodities.

Goldman Sachs JBWere, an Australian affiliate of the world's largest investment bank, last week increased its price forecast for copper a second time in less than a month.

And sure enough, Chinese stocks rebounded the day after the GDP report. The benchmark CSI 300 Index, which tracks yuan- denominated "A" shares listed in Shanghai and Shenzhen, climbed 4.4 percent, its biggest one-day gain since Jan. 15.

According to Jonathan Anderson, UBS AG's chief Asia economist in Hong Kong, equity investors in China shouldn't be perturbed by monetary tightening and must instead focus on direct government action to rein in runaway equity valuations. Administrative measures, which caused the market to decline in February, are the real risk.

"Our view is that interest-rate adjustments and base-money liquidity tightening have no real impact on equity demand," Anderson wrote in an April 18 note to clients.

`Beijing Is Happy'

China's central bank governor, Zhou Xiaochuan, has said his priority is to keep inflation in check because using monetary policy to prick asset-price bubbles could lead to overtightening, according to a report by China Business News.

All of this seems to suggest that 2007 may be a year of 11 percent GDP growth in China.

Credit Suisse Group's economist in Hong Kong, Dong Tao, is predicting just that. If Tao is correct, this would be the quickest expansion in the Chinese economy since 1994 when the economy grew almost 13 percent.

"Beijing is happy to have this growth and it's going to continue for the foreseeable future," says Donald Straszheim, vice chairman of Roth Capital Partners in Newport Beach, California.

Subdued Inflation

In 1994, inflation in China averaged 22 percent, the highest since the 1949.

Prices today are climbing, too, though not nearly as quickly. Consumer prices in China rose 3.3 percent from a year earlier in March, their fastest gain in more than two years.

However, the impetus for higher prices is once again coming from food, which was the principal culprit in 1994, too.

Will the authorities seek to control the price gains in agricultural commodities? They may not. After all, the government is committed to increasing rural incomes. Rising food prices allow them to meet that objective.

While the 25 percent growth in urban fixed-asset investments in the first quarter from a year earlier is high, it's driven by infrastructure projects, Credit Suisse's Tao says.

"There isn't a clear policy objective for a straightforward cooling of the macro-economy," Tao wrote in a research note to clients.

What are the implications of the GDP report for the Chinese currency? JPMorgan Chase & Co. economist Frank Gong says that at 7.72 to the U.S. dollar, the yuan is undervalued by at least 40 percent. That may well be true.

Yet, if the government isn't in a hurry to cool the economy, it's doubtful the central bank will be too eager to allow quicker yuan appreciation.

On every count, the brouhaha about the GDP report was rather unnecessary.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)