Seoul, South Korea -- (SBWIRE) -- 08/23/2010 -- China’s economy expanded 11.9% from a year earlier in the first quarter of 2010, a strong result highlighting both the strength of the recovery in China and the increasing risks of overheating.

Inflation has been subdued so far, with the consumer price index rising 2.4% in March from a year earlier, marginally lower than February’s 2.7% rise and close to Beijing’s 3% target.

“Strathclyde Associates” Taking A Look - China’s Economy: The IMF expects consumer price inflation to be 3.1% for this year but to slow down to 2.4% in 2011. The government is of the opinion that China’s main problem is that property prices are too high, not that the total economy is overheating. Therefore, most of its policy measures in recent weeks have focused narrowly on reining in property speculation, while conspicuously avoiding broader measures — like interest rate hikes — that would affect everyone.

The State Council repeated its promise to “resolutely curb” excessive property price rises by restricting speculative purchases while increasing the supply of land for housing and government supports for low-income housing. The US Federal Reserve Chairman Ben Bernanke has said that the yuan is “undervalued… to promote a more export-oriented economy” and an International Monetary Fund study also suggested that a currency move wouldn’t harm Chinese growth if handled properly.

“Strathclyde Associates” Taking A Look - China’s Economy:The Fed chairman’s remarks come amid growing expectations that China will allow its currency to rise, perhaps before leaders of the Group of 20 industrialized and developing countries meet in Canada in June. But China does not want to be seen taking decision under the US pressure. Moreover, China has argued that yuan appreciation is not the solution for the US unemployment. The political realities have forced the U.S. Treasury to postpone a decision on whether to label China a “currency manipulator,” in an effort to give China some political breathing space to revalue its currency without appearing to bow to U.S. pressure.

Already many influential economists in China have publicly advocated a change, arguing that a more flexible currency would help China deal with the rising domestic prices fuelled by its rapid growth.

“Strathclyde Associates” Taking A Look - China’s Economy:Xia Bin, a prominent Chinese scholar recently named an outside adviser to the People’s Bank of China, is of the view that the current de facto peg is no longer necessary because “the worst of the crisis is over.”

But he argued that a large move in the currency’s value would be unwise, and suggested a return to the pre-crisis policy of a somewhat flexible but closely managed exchange rate. A yuan revaluation, albeit a relatively small one, could be on the cards as soon as May.