China said yesterday that its economy grew 9.7 percent in the first quarter, setting off warnings that companies are investing at a feverish pace and triggering expectations of an imminent interest rate hike.
Asia's second-largest economy was fueled by heavy spending on new plant and equipment in the first three months, with investment in fixed assets rising by a breathtaking 43 percent, according to the National Bureau of Statistics.
"It's just unsustainable," said Dong Tao, a Hong Kong-based economist for Credit Suisse First Boston.
PHOTO: REUTERS
"I think an interest rate tightening is inevitable," Dong said.
The first-quarter economic growth figure compared with a 9.9 percent expansion in the fourth quarter of last year and 9.1 percent for all last year.
Zheng Jingping, the spokesman of the statistics bureau, acknowledged there were "problems."
"The scale of investment in fixed assets is too large and growth is too fast," he told a briefing in Beijing.
"The blind and repeated investment in low-level construction projects in certain industries and selected areas is not being put under effective control," he said.
Investment in real estate projects, an area of particular concern among policy makers, was up by a staggering 41.1 percent in the first quarter, according to the bureau's figures.
"This leads to bottleneck restrictions in the supply of major raw materials, energy and transportation, and greater pressure for price rises," Zheng said.
The statistics bureau said the consumer price index rose a relatively modest 2.8 percent in the first quarter.
"The dilemma facing the central bank and government at the moment is that inflation is seemingly under control," said DBS Bank economist Chris Leung.
"What is not okay is fixed-asset investment," he said.
A vigorous debate is underway within the government and among independent economists about the health of China's growth, and what, if anything, should be done about it.
The central bank has undertaken a series of incremental steps to slow credit, such as a hike in the rediscount rate and a rise in the banks' cash reserve ratio but some argue that that will not be enough.
At the same time, an interest rate hike would be virtually unprecedented as China has not raised local-currency deposit rates since 1993.
The IMF joined the fray on Wednesday, saying in a report that the Chinese economy appears to be overheating and it was unclear whether authorities have it under control.
"There are some signs of overheating," IMF chief economist Raghuram Rajan said.
"There is a tremendous amount of investment that is going on, credit has expanded tremendously and the Chinese authorities are trying to control this," he said.
"The jury is still out on whether they have brought it under control," Rajan said.
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