Doing Business in China

Economists predict China Likely to Taper Stimulus shifting economy policy from groth to inflation 2010 With gross domestic product growing 8.9% 3q

Many economists said the growth acceleration and the change in language indicate that Beijing will shift policy next year.

Thursday's data provide "further evidence the authorities will soon be shifting attention from growth to inflation," said ING Financial Markets economist Tim Condon. He said China is likely to raise benchmark interest rates in early 2010, a forecast shared by many economists.

Officials also appear to be growing worried that inflows of foreign capital into China may accelerate as the recovery strengthens. Such flows of money could raise the risks of asset-price bubbles and complicate government efforts to manage inflation. Analysts say China could let the yuan appreciate to help restrain inflation, because a stronger yuan would reduce the cost of imports. Some caution that Beijing tried a similar strategy in early 2008, but didn't achieve great success in containing inflation or stemming the inflows.

Officials have indicated that any changes won't be abrupt. "According to my understanding, our policy won't change at the moment," Mr. Li said in a news conference.

That cautious approach itself brings risks, some analysts say. "There is now a risk that fiscal and monetary stimulus is left too loose for too long," Royal Bank of Scotland economist Ben Simpfendorfer said in a research report. "The biggest challenge for the authorities is that the private sector has yet to fully recover. This makes it difficult to tighten early."

Still, growth overall remains robust. Industrial production in September rose 13.9% from a year earlier, outpacing the median market expectation for a 13.3% increase, and was higher than August's 12.3% gain.

In the past several weeks, Beijing has emphasized it will discourage the buildup of excess output capacity in sectors, including steel and polysilicon, through curbs on lending and land use. But crude-steel output in September hit the second-highest volume on record, underscoring the formidable odds stacked against the government's campaign to slim down the industry for the country's long-term economic health.

Meanwhile, prices of many goods continue to march higher, though key measures are still below their levels of last year. The consumer-price index fell 0.8% in September from a year earlier, but rose 0.4% from August.