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China’s Economic Growth Cools as Inflation Accelerates

China’s economy grew 9.6 percent in the third quarter, the smallest gain in a year, as inflation accelerated in September to the fastest pace in 23 months.

The increase in gross domestic product from a year earlier topped economists’ median 9.5 percent estimate. Consumer prices rose 3.6 percent last month, the statistics bureau said at a briefing in Beijing. That matched the median forecast.

China’s interest-rate increase two days ago, the first since 2007, highlighted the government’s confidence in the nation’s recovery and concern at asset-bubble and inflation risks. The strength of the economy may determine how much the government allows the yuan to gain as international tensions build over currency interventions, a topic to be discussed by Group of 20 officials meeting from tomorrow in South Korea.

“Tuesday’s rate hike confirms our view that policy makers have become more comfortable with growth after a policy-induced slowdown,” Chang Jian, a Hong Kong-based chief China economist at Barclays Capital, said before today’s release.

Industrial output rose 13.3 percent in September from a year earlier, the statistics bureau said. That compared with a 13.9 percent gain in August and the median 14 percent estimate in a Bloomberg News survey of 23 economists.

September inflation compared with a 3.5 percent increase in prices in August from a year earlier. Second-quarter economic growth was 10.3 percent.

Stocks Decline

The Shanghai Composite Index, which this month entered a so-called bull market, fell 0.5 percent as of 10:10 a.m. local time. The yuan was little changed against the dollar.

Policy makers have grappled this year with rising consumer prices and record property-price gains after record lending and a 4-trillion yuan ($600 billion) stimulus package pumped up growth during the financial crisis. The nation’s foreign exchange-reserves jumped last quarter to $2.65 trillion, highlighting the risk that an excess of cash in the financial system will fuel inflation.

Economic growth has moderated from 11.9 percent in the first quarter as officials rein in credit growth, clamp down on speculation in the housing market and chase energy-efficiency and pollution targets.

Urban fixed asset investment gained 24.5 percent in the first nine months of 2010 from a year earlier. That compared with economists’ 24.6 percent median estimate.

Steering ‘Middle Course’

Retail sales rose 18.8 percent in September from a year earlier, the bureau said. Producer price inflation cooled to 4.3 percent.

Policy makers seem to be steering the Chinese economy on “a middle course between overheating and a sharp downturn,” Brian Jackson, an emerging-market strategist at Royal Bank of Canada, said this week.

The rate increase followed a decision in June to scrap a crisis policy of pegging the yuan to the dollar to aid exporters. Since then the Chinese currency has gained about 2.6 percent. U.S. Treasury Secretary Timothy Geithner wants more, arguing this week that the yuan remains “significantly undervalued, more so than is true of any major, significant emerging-market currency.”

The yuan declined by the most in two months yesterday to close at 6.6519 per dollar. Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said yesterday that the economy can withstand appreciation, forecasting the currency will gain another 3 percent against the dollar by year-end and 5 percent in 2011.

Relying on China

Mining companies BHP Billiton Ltd. and Rio Tinto Group, carmaker Bayerische Motoren Werke AG and restaurant chain operator YUM! Brands Inc. are relying on China’s industrial and consumer demand as austerity measures and unemployment hamper developed economies. The U.S. Federal Reserve said yesterday that the American economy expanded at a “modest pace” in September and early October.

Pledges by China’s government to boost the construction of public housing and speed the completion of stimulus projects may help to set a floor under the nation’s growth. In addition, a five-year plan for 2011 to 2015 will include investment in infrastructure, especially in central and western regions, and in emerging industries such as renewable energy.

The World Bank this week lowered its outlook for the economic expansion next year in China and across East Asia. China’s 2011 growth forecast was cut to 8.5 percent from an April estimate of 8.7 percent. That would be the least in almost a decade.

China should tolerate slower growth as the nation adjusts its economic model, labor costs rise and trade protectionism worsens, government economist Zhu Baoliang wrote this week in the overseas edition of the official People’s Daily.

The nation’s “potential” growth rate is moderating to around 9 percent from an average pace of 11 percent in the past five years and 10 percent in the past three decades, said Zhu, chief economist at the State Information Center.