CHINA looks set to apply the brakes to its runaway economy after data yesterday confirmed that its annual GDP growth in the first quarter accelerated to 10.2 per cent, from 9.9 per cent in the previous quarter, after strong investment, exports and bank lending.

Beijing has stood pat in the past 18 months as the United States, the eurozone and, latterly, Japan have tightened policy to dampen the impulse to global economic expansion imparted by China’s world-beating average GDP growth rate of 10 per cent a year from 2003 to 2005.

That could be about to change. China’s National Bureau of Statistics admitted that investment and lending growth were “prominent problems” that demanded the Government’s attention. Unbridled expansion risks creating excess industrial capacity that could spawn a new crop of bad loans for China’s big banks, the economy’s Achilles’ heel.

“We expect financial conditions to tighten in the second quarter,” said Hong Liang, chief China economist at Goldman Sachs in Hong Kong.

The problem for policymakers is that China’s economy, caught in transition between central planning and the free market, does not respond to conventional market signals such as interest rate rises.

Access to credit in China is largely determined not by a borrower’s credit rating, but by political connections. This means Beijing typically has to resort to blunt administrative instruments such as blanket bans on lending to certain sectors.

Another option is to let the yuan rise much faster. President Hu Jintao is already meeting US criticism that the yuan is unfairly undervalued.

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