Monday, May 14, 2007

China Factory, Property Spending May Grow 25 %

China's spending on factories and real estate probably grew 25.3 percent in the first four months of 2007 from a year earlier, suggesting the central bank may need to raise interest rates to cool investment.

That's the median estimate of 19 economists surveyed by Bloomberg News and compares with a 29.6 percent increase in urban fixed-asset investment a year earlier. The statistics bureau releases the figures at 10 a.m. on May 17.

The pace of investment increases the risk that the world's fastest-growing major economy will be saddled with idle factories and bad loans if demand unexpectedly slows. Central bank Governor Zhou Xiaochuan is also concerned a bubble is growing in the stock market as booming exports pump cash into the economy.

``Liquidity and too much credit are again fueling a cycle of poor-quality investment and industrial overcapacity,'' said Michael Kurtz, an economist at Bear Stearns Asia Ltd. in Hong Kong. ``Three more interest rate hikes are likely before the end of the year -- at a minimum.''

The full-year increase in fixed-asset investment in 2006 was 24.5 percent.

Industrial production likely climbed 17.5 percent in April from a year earlier, little changed from 17.6 percent growth in March, the Bloomberg News survey showed. That figure is due at 10 a.m. tomorrow.

The People's Bank of China has raised borrowing costs three times since April 2006 and ordered banks to set aside larger reserves seven times. The one-year benchmark interest rate is 6.39 percent.

Widening Trade Surplus

China's trade surplus for the first four months widened to $63.3 billion, 88 percent more than a year earlier.

Industrial companies' profits jumped 44 percent in the first two months, swelling investment coffers since state businesses retain their profits. Baosteel Group Corp., China's biggest steelmaker, and Handan Iron & Steel Group plan to build a 19 billion yuan ($2.5 billion) plant in the northern city of Handan to boost production.

``China should mandate a dividend policy so that parts of those incomes go back to the central government, who should allocate the resources to social services, helping to boost consumption as well,'' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong.

Manufacturing overcapacity may lead to deflation and turn investment growth into a ``curse,'' the Asian Development Bank said in March. The nation's steelmaking capacity of 462 million metric tons at the end of 2006 was 10 percent more than production.

`Extraordinary' Investment Level

China's average of a 43 percent investment to gross domestic product ratio over the past three years was the highest in the world, according to HSBC Holdings' economist Qu Hongbin in Hong Kong.

``Such an extraordinary investment ratio has already caused some concerns among the Chinese policymakers about the efficiency of investment,'' Qu said in a May 7 report. ``Indeed, when China is investing more than 40 percent of its GDP every year, it is inevitable that some low-return and white elephant construction projects have emerged, particularly when local governments are heavily involved in investment.''

M2, the broadest measure of money supply, grew 17.1 percent in April, exceeding the central bank's target for a third month. Banks extended 1.8 trillion yuan of new loans in the first four months, more than half the total for the whole of last year.

The benchmark CSI 300 Index of stocks has soared more than 80 percent this year as Chinese households flock to the market.

Besides monetary policy, the central bank is using administrative measures to try to cool fixed-asset investment, such as minimum prices for land for industrial developments from Jan. 1. New investment projects fell by 2,294 to 31,117 in the first quarter from a year earlier, according to the statistics bureau.

China's government has raised minimum wages and expanded the welfare system to try to tilt economic growth towards consumption instead of relying so heavily on exports and investment.

Retail sales probably gained 15.1 percent in April from a year earlier, little changed from the previous month's 15.3 percent gain, the Bloomberg News survey showed. The statistics bureau will release the figures at 10 a.m. today.

China's economy, the world's fourth-largest, grew 11.1 percent in the first quarter, accelerating from 10.4 percent in the previous three months.

The following tables show economists' estimates for percentage changes in China's urban fixed-asset investment in the first four months from a year earlier, followed by growth in industrial production and retail sales in April.

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