China Shows No Signs of Slowing as Investment, Exports Soar

China, the world's fastest- growing major economy, showed no sign of slowing in the first quarter as investment in factories and real estate surged, a government report may show tomorrow.

Gross domestic product in China, which overtook the U.K. to become the world's fourth-largest economy last year, rose 10.2 percent in first quarter President Hu Jintao said on April 16. The government will officially release first- quarter economic indicators tomorrow in Beijing.

China's foreign-exchange controls and relaxed curbs on lending have led to an abundance of cheap credit for real estate and manufacturing projects. The nation's increasing dependence on investment and exports for growth makes government efforts to encourage consumption more urgent, economists said.

``The government's riding a tiger and they are scared of getting off,'' said Andy Xie, chief Asia economist at Morgan Stanley in Hong Kong. China's investment and export- led growth model is ``isn't sustainable. We need to see improvements in social security and healthcare that will help unleash China's consumption potential.''

Two years after Premier Wen Jiabao cracked down on excessive lending to industries such as steel and property, China is still expanding on the back of an export boom that drove three years of 10 percent growth.

Investment in fixed assets in urban areas in the first two months of the year accelerated to 26.6 percent from a year earlier, up from 24.5 percent in the same period in 2005. First-quarter growth was likely barely changed at 26.4 percent, according to a Bloomberg News survey. The trade surplus in the first quarter widened 41 percent to $23.2 billion, the government said last week.

Hu's Concern

The growth figure presented by Hu topped all forecasts in a Bloomberg News survey of 25 economists compiled before his remarks. The president said he was concerned about the quality of China's growth.

``We are concerned about the pace of development and the quality and the effect of our growth,'' he said last week. ``We are also concerned about saving our resources, environmental protection and the improvement of our people's livelihood.''

Investment accounted for 45 percent of China's economy in 2004, the most since 1994, and that ratio could climb to an a record 50 percent this year, the Asian Development Bank said this month. The government has not yet released data allowing economists to precisely calculate the share of investment in GDP last year.

The share of consumption fell to 55 percent in 2004, the lowest since free-market reforms began in 1978, the Asian Development Bank said without giving a forecast for this year.

Blueprint

In announcing their blueprint for economic development for the coming five years in October, China's leaders said they will encourage more balanced growth and seek to stimulate consumer spending in an economy where per capita incomes are 24 times lower than in the U.K. and 10 times lower than in South Korea.

``If you look at the growth pattern in the first quarter, it's going against what the government wants to see,'' said Ha Jiming, chief economist at China International Capital Corp., the nation's largest investment bank. ``If China keeps growing like this we could see more overcapacity and deflationary pressure on the economy.''

Rapid growth in the money supply, fuelled by higher savings and surging foreign exchange reserves, is providing banks with a flood of capital to lend for investment projects, threatening to inflate asset prices and add to the $162 billion of bad loans at the nation's banks.

M2, the broadest measure of money supply, grew 18.8 percent from a year earlier in March, close to the fastest pace in two years. The central bank targets 16 percent expansion this year.

Lending

New yuan lending jumped 70 percent from a year earlier in the first quarter, to 1.26 trillion yuan ($157 billion), the central bank said April 14. That was equal to half of the bank's 2.5 trillion yuan loan growth target for the full year.

``The recent data has strengthened the central bank's view that overinvestment is a systemic problem in the economy and that asset bubbles are everywhere,'' said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. ``We are going to see some serious policies introduced over the next few weeks.''

The central bank may raise the ratio of deposits that banks must keep as reserves and allow the yuan to rise faster against the dollar to stem liquidity growth, according to economists including Green and Grace Ng at JPMorgan Chase & Co.

Foreign Exchange

Faster appreciation of the yuan, which has gained only 1.2 percent against the dollar since a 2.1 percent revaluation in July, may help moderate growth in the nation's foreign exchange reserves and rein in money supply growth.

The nation's foreign-exchange reserves are now the highest in the world, surging 32.8 percent from a year earlier to $875.1 billion at the end of March, the central bank said last week.

The government's focus on raising consumption to sustain the nation's pace of growth could take years to achieve, economists said.

``China is at a point in growth where South Korea was in maybe the mid-to-late 1960s,'' said Standard Chartered's Green. ``It took Korea another couple of decades before it got to a situation where it was a much more consumer-reliant economy.''