China's economy finished 2009 with a flourish as a 10.7 percent year-on-year increase in fourth-quarter GDP took full-year growth to 8.7 percent, easily surpassing Beijing's 8 percent target.

An acceleration in consumer inflation to 1.9 percent in the 12 months to December from November's 0.6 percent reading is likely to reinforce worries about possible economic overheating on the back of renewed surge in bank lending, potentially prompting stronger tightening measures by authorities.

KEY POINTS:

-- Economists had forecast 10.9 percent Q4 GDP growth yr/yr

-- GDP growth for Q109 revised up to 6.2 pct from 6.1 pct; growth for Q309 revised up to 9.1 pct from 8.9 pct

MARKET REACTION:

-- China's benchmark Shanghai Composite Index <.SSEC> was down 0.7 percent at 0249 GMT compared with a rise of 0.15 percent before the data.

-- Stocks in Hong Kong <.HSI> were down 1.2 percent, compared with a fall of 0.44 percent before the figures came out.

COMMENTARY:

YU SONG AND HELEN QIAO WITH GOLDMAN SACHS IN HONG KONG, IN A NOTE TO CLIENTS:

The overall macro picture is one with continued strength in activity growth and rapidly rising inflation. We believe further policy tightening measures over and beyond what have already been implemented are needed in order control inflation in the coming months.

JING ULRICH, MANAGING DIRECTOR AND CHAIRMAN, CHINA EQUITIES AND COMMODITIES, J.P. MORGAN IN HONG KONG, IN A NOTE TO CLIENTS:

The first half of 2010 is likely to be characterized by gradual policy tightening, chiefly through administrative measures. Concerns about capital inflows and the health of the export sector will limit the scope for interest rate tightening, but we do expect to see a moderation in new bank loans and the use of reserve requirements to manage the volume of money supply.

DONG XIAN'AN, CHIEF MACROECONOMIST WITH INDUSTRIAL SECURITIES IN SHANGHAI:

Excluding the impact from cold weather, December CPI and PPI still show strong inflationary pressure. We maintain our view that average CPI this year will be above 3.5 percent and annual GDP growth will be 11 percent.

Industrial profits in 2010 will probably exceed market expectations and the risk of economic overheating is increasing.

I expect the central bank to wait and see for now, and then raise rates at an unexpected time, to a higher-than-expected extent.

VISHNU VARATHAN, ECONOMIST, FORECAST LTD IN SINGAPORE:

The risks are certainly pointing that way (toward further tightening). Inflation has picked up faster than expected. This all reinforces that China needs to bring forward or hasten whatever plans they have in the pipeline.

From now through Q2, it won't be a surprise to see a rate hike of 27 basis points. Currency reevaluation could very well start off in the early part of Q2 if not late March.

QI JINGMEI, ECONOMIST WITH THE STATE INFORMATION Center IN BEIJING:

From the figures, we can see the economy in December was increasing rapidly, and the overall trend is good. And the trend will continue this year. We expect GDP for the first quarter this year will increase by 11 to 12 percent.

As to policy changes, measures have been tightening in January, like for real estate and credit. And the change will continue to be of structural or partial tightening.

NIE WEN, ECONOMIST AT FORTUNE TRUST CO. IN SHANGHAI:

The fourth quarter GDP figure shows very strong growth, indicating the recovery momentum has been further consolidated, although the big rebound was partly due to a low comparison base in the same period a year earlier.

Both CPI and PPI showed about one percent month-on-month growth, placing much pressure on overall price levels in the coming months.

On the policy front, I think the further increase in consumer prices will prompt the government to introduce more tightening measures, including interest rate hikes in the second quarter of this year.

LIN SONGLI, ANALYST WITH GUOSEN SECURITIES IN BEIJING:

The figures in December speak more than the full-year ones. They match market expectations.

Policy makers should have known these figures already, so I do not expect any big policy changes after the release. But the timing of interest rate rises is not far off, and should be late in the first quarter of this year.

CHEN XINGDONG, CHIEF CHINA ECONOMIST WITH BNP PARIBAS IN BEIJING:

This is not surprising, it is expected. In 2010 growth will continue to accelerate. China is already overheating, especially in investment. China needs to tighten investment in particular.

Today China's government and policy makers are still too conservative about CPI.

CAO XUEFENG, SENIOR STOCK ANALYST AT WESTERN SECURITIES IN CHENGDU:

This set of data, in particular the 10.7 percent rise in the GDP in the fourth-quarter, confirms that China's economy is really heading for a full recovery.

The 1.9 percent December CPI rise is a relatively high figure, but with the market already expecting inflation to pick up at a pace faster than earlier thought, its negative impact on Chinese markets will be limited.

These set of data, in my view, will not be enough to push the central bank to raise its benchmark deposit and lending rates ahead of time.

We expect the central bank to continue relying on quantitative tools and window guidance for tightening in the near term.

GAO WEIDONG, ANALYST WITH ESSENCE SECURITIES IN BEIJING:

The rhetoric, which emphasizes flexibility, is the same as that at the Central Economic Work Conference in December.

Given the frequent policy changes seen in the past couple of weeks, we do not see an interest rate increase in the short term. Regulators have to monitor the situation until the next batch of figures.

We maintain the view that the PBoC (central bank) will likely raise interest rates in the second quarter.

XING ZIQIANG, ECONOMIST AT CICC IN BEIJING:

Obviously the month-on-month growth momentum is very strong. I think the quarter-on-quarter economic growth for the last three months is about 12 percent. Month-on-month CPI growth is around 1 percent.

The cabinet has said this week that they will pay close attention to monthly indicators as a reference for their policy reaction.

So I think the chances for us to see interest rate rise in the first quarter are increasing. And yuan appreciation is likely to resume in March or April, though the rise will be gradual, say about 3-5 percent a year.

The fourth quarter GDP is a bit lower than my expectation.

LINKS:

-- See the National Bureau of Statistics website at www.stats.gov.cn. The report might not be immediately available.

BACKGROUND:

-- Since 1978, China has averaged GDP growth of close to 10 percent a year, but the government had to ramp up spending and shift to an extremely loose monetary policy to put the country on track to meet its 2009 growth target.

-- With growth now solidly anchored, the People's Bank of China has started to tighten monetary policy. The central bank is pushing up money market rates and last week raised bank reserve requirements for the first time since June 2008.

-- The PBOC has also imposed punitive reserve requirements on banks that have spearheaded an early-year lending spree and ordered them to curb their lending.

(Reporting by Eadie Chen, Michael Wei, Aileen Wang, Langi Chiang, Ralph Jenings and Sally Huang in Beijing; and Lu Jianxin and Farah Master in Shanghai; Editing by Jason Subler)

Inflation China