Learn Chinese - China investment slowed

Opinion / China Watch

China investment slowed

By Nerys Avery (Bloomberg)
Updated: 2006-11-15 11:07

China's spending on factories, real estate and other fixed assets
probably grew at a slower pace in October as the government curbed
lending and project approvals.

Fixed-asset investment in towns and cities climbed 27.6 percent in the
first 10 months from a year earlier after rising 28.2 percent through
September, according to the median forecast in a Bloomberg News survey of
19 economists. The report is due tomorrow at 10 a.m. in Beijing.

Slowing spending may ease pressure on Premier Wen Jiabao to tighten
restrictions on lending and raise interest rates, which could cause
China's record trade surplus to widen further. With investment cooling,
Wen may seek to narrow the trade gap by encouraging consumption and
allowing faster currency gains.

"Significant new macro tightening measures, over and above the ones in
place, are undesirable if not flanked by measures to boost consumption,"
Bert Hofman, chief economist at the World Bank in Beijing said yesterday.
"Policymakers' concerns about too rapid investment growth have diminished
from three months ago."

China's industrial production rose last month at the slowest pace in
almost two years, gaining 14.7 percent from a year earlier, the
statistics bureau said today.

Expansion in China, the world's fourth-largest economy, accelerated to
11.3 percent in the second quarter from a year earlier, the fastest pace
in 12 years. Growth was powered by surging investment that created
surplus capacity in industries such as steel, cement and autos.

Central Bank Vigilant

That prompted Wen to step up efforts to control spending. He imposed a
mix of administrative and monetary tools to restrict investment,
tightening land use and project approvals, raising interest rates and
forcing banks to set aside more money as reserves to shrink the pool of
funds available for lending.

Economic growth slowed to 10.4 percent in the third quarter as investment
cooled, lessening expectations that the government will have to clamp
down again.

"We expect a gradual relaxation of administrative austerity measures,
less frequent monetary tightening actions and a neutral fiscal policy
structurally favoring consumption," Ma Jun, head of China research at
Deutsche Bank in Hong Kong, said in a report.

Still, the central bank yesterday indicated it isn't ready to stand down,
saying the slowdown in lending and investment since June is "unstable"
and warning that spending may rebound as the trade surplus pumps cash
into China's economy.

Record Trade Surplus

"Under the current liquidity conditions in China, raising the reserve
requirement ratio and issuing central bank bills are suitable tools," the
bank said in its third-quarter monetary policy report, referring to its
two main methods for removing money from the financial system.

The trade surplus reached a record $23.8 billion in October, bringing the
total for the year to $133 billion, a third higher than for all of 2005.
The gap helped drive China's foreign exchange reserves to $1 trillion,
the most ever held by any nation.

On Nov. 3, the central bank raised the percentage of deposits lenders
have to set aside as reserves by 0.5 percentage point to 9 percent,
effective Nov. 15. The ratio has increased in three steps from 7 percent
in June.

"Investment, output and money supply growth have all slowed to a range
that the government is happier with and that's more sustainable," said
James McCormack, head of Asia sovereign ratings at Fitch Ratings in Hong
Kong. "What they have to do now is to tackle the root cause of the
problem, which comes back to the balance of payments surplus."

Power Generation

Such a push should involve letting the yuan rise faster, which would
encourage imports while damping exports, the World Bank said yesterday.
The Chinese currency has risen 3 percent since July 2005, when China
revalued it and imposed a 0.3 percent daily trading band against the
dollar.

The government has taken a selective approach to curbs on investment,
encouraging projects in areas such as transport and power generation to
avoid bottlenecks as the economy expands.

Electricity producers including Huaneng Power International Inc. will
boost the nation's total generating capacity by at least 80,000 megawatts
-- or about 15 percent -- this year, and will add another 75,000
megawatts in 2007, the China Electricity Council said last month.

At the same time, Wen is restricting wasteful spending in industries that
are heavy consumers of energy, such as aluminum and steel. Authorities in
Inner Mongolia in northern China said last month they canceled 43 new
investment projects in the first half, without specifying further.

Bloomberg Survey

Other companies are pulling back as falling profits make new projects
less viable.

Semiconductor Manufacturing International Corp., China's biggest
chipmaker, will cut its planned capital spending for next year to less
than $700 million from $1.1 billion, the company said on Oct. 31, after
its third-quarter loss widened on falling prices.

The following tables list economists' forecast for growth in urban
fixed-asset investment and industrial output in October from a year
earlier.

Hot Talks

� Does the future belong to China?

� Ah all i know is that i know so little..

� How to be ready for a foreign boss

� Koizumi visits Yasukuni shrine for the 5th time

� Leave a space for ur solitude

Most Commented/Read Stories in 48 Hours

Learn Chinese