China's economy grew 10.4% in Q4 and 10.7% to 20.94 trillion yuan ($2.68t) in 2006 (vs. 10.4% in '05), its fastest clip in 11 years. CPI hit a two year high at 2.8% in December. Now it looks like China's central bank might have to consider raising rates (currently 6.12% for lending) again after it last did so in August. Efforts to reduce liquidity have not exactly worked as Beijing continues to worry about over-investment. Foreign reserves meanwhile, topped $1 trillion last year as China's trade surplus grew 74% y-o-y to $177.5b. Note quarterly GDP actually declined compared to revised figures of 10.6% in Q3 and 11.5% in Q2. The yuan is now up around 6.4% against the US$ since its peg ended in July '05. Another hot topic in China is domestic consumption, which lags investment and fell to 51.9% in '05, the lowest level since free-market reforms began in 1978, according to Bloomberg. The commissioner of China's National Bureau of Statistics comments, "Problems still exist with the irrational relationship between investment and consumption, and the imbalance of payments and excess liquidity in the banking system."
• Sources: Bloomberg, China Daily
• Related commentary: China's Commerce Minister: Reducing Trade Surplus is a Top Priority, Despite Incredible Growth, China's Markets Account For Small Percent of GDP, China's Central Bank Still Trying to Tame the Dragon
• Potentially impacted stocks and ETFs: Currency ETFs: PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV), Euro Currency Trust (NYSEARCA:FXE). Bond ETFs: iShares Lehman Aggregate Bond (NYSEARCA:AGG), iShares Lehman 1-3 Year Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 Year Treasury (NYSEARCA:IEF), iShares Lehman 20+ Year Treas Bond (NYSEARCA:TLT), iShares Lehman TIPS Bond (NYSEARCA:TIP). China ETFs: China Fund (NYSE:CHN), Greater China Fund (NYSE:GCH), iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI), JF China Region Fund (NYSE:JFC), PowerShares Golden Dragon Halter USX China (NASDAQ:PGJ)
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