Mon, Mar 21, 2005 - Page 10 News List

China's economy roaring despite cooling measures

INEFFECTIVE POLICIES Despite efforts to put the brakes on China's red-hot economy, industrial output rose by an alarming 16.9 percent in two months

AFP , Shanghai

Official data suggesting a quickening of China's already fast-paced economy has rekindled overheating concerns, prompting economists to ask: Will Beijing revert to more central planning or market-based policies next?

"Contrary to initial impressions, Chinese government statisticians have just reported a stunning re-acceleration of industrial output growth over the first two months of 2005," Morgan Stanley chief economist and managing director Stephen Roach said after the release of data this week.

China's industrial output rose 16.9 percent to 903 billion yuan (US$109 billion) in the first two months of the year, with much of the growth attributed to overseas demand for industrial exports.

No figures were given for February, when China enjoyed a week-long Lunar New Year holiday, although the two-month figure follows an 8.9 percent year-on-year increase in January.

Although the Chinese holiday distorts data, Roach said: "the numbers were a shocker."

"A Chinese economy that appeared to be on a path of measured deceleration over the course of 2004 has clearly re-accelerated," he said.

Further fuelling fears that the year-long central macroeconomic controls ordered by Beijing have not been effective, China's fixed asset investment, a strong indicator of how much the government is spending on infrastructure, remained in the fast lane.

It grew 24.5 percent to 422.2 billion yuan in the first two months of the year, a rate that was fractionally lower than the 25.8 percent increase in fixed asset investment for last year but well above the recently set target of 16 percent growth.

"At the current pace, we think investment is still expanding too rapidly, especially compared to GDP and consumption," Huang Yiping said in a note.

"Some policymakers were comfortable with 9.5 percent GDP growth last year, primarily because the average growth for the past 25 years was 9.2 percent. However, the problem lies in the structure of the economy," argued Huang.

Huang worries that the amount of fixed capital powering the Chinese economy likely rose to a 45 percent share of the country's GDP, a level widely acknowledged as developmentally unsustainable.

"If this trend continues, then the risk of a hard landing will rise further, despite the existing tightening measures," Huang said.

That China's leadership is worried about the unbalanced character of the world's seventh largest economy, was underscored by another centrally-planned decision this week to marginally increase home loan interest rates.

China's central bank raised the minimum rate for a mortgage loan of more than five years to 5.51 percent from 5.31 percent and urged commercial banks to increase down payments to 30 percent of a property's value instead of the current 20 percent.

"The property sector is really the bane of the government now, it has gone crazy in some big cities such as Shanghai," said Yi Xianrong, research fellow at the Institute of Bank and Finance of the Chinese Academy of Social Sciences.

"The risk in property sector now determines the risk of the country's economy as a whole, and it determines the future development of the country's economy," said a worried Yi.

At the close of China's annual parliamentary session Monday, Chinese Premier Wen Jiabao (溫家寶) drove home the point that the central government faces an ongoing "battle" in taming the economy's intractable growth.

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