China warns of overheating............China warns of overheating from ‘excessive' investment
GEOFFREY YORK
Tuesday, July 18, 2006
BEIJING — Despite a flurry of efforts to cool down its growth, China confirmed Tuesday that its economy is expanding at its most frantic pace in more than a decade, sparking fears that it could be dangerously overheating.
China's statistics bureau said the economy grew at an unexpectedly torrid annual rate of 11.3 per cent in the second quarter of this year — far above the official targets and the predictions of most economists.
A government spokesman confirmed the economy has become a serious concern. “Investment in assets is excessive and there is an oversupply of loans,” said Zheng Jingping, a spokesman for the National Bureau of Statistics.
“In the long run, these will cause inflation,” he told a news conference Tuesday. “An economic model that's based on excessive fixed-asset investments and exports is not sustainable.”
The latest numbers show a continuing acceleration of China's booming economy, which recently overtook Britain to become the fourth largest in the world.
China's growth was 10.3 per cent in the first quarter of this year, but it continued to speed up in the second quarter. China's official plan had called for 8-per-cent growth this year, but that target will now be virtually impossible to attain.
Even the state-owned media in China are now acknowledging that the country is facing an economic problem. On state television Tuesday, an economist from the Asian Development Bank said the economy is overheating. And the state news agency, Xinhua, quoted experts who said the growth rate is “alarmingly” high.
Fixed-asset investment — including roads and factory equipment — jumped 31.3 per cent in the first half of this year, while industrial production rose 19.5 per cent and exports soared 25.2 per cent.
Much of the growth is the result of a surge in the construction of houses, factories and shopping malls. There was a 22-per-cent rise in the number of new construction projects started in the first half of this year, compared with the previous year.
Banks issued $224-billion (U.S.) in loans in the first five months of this year — more than three-quarters of the official target for the entire year. The government is worried that the construction boom could create an oversupply of buildings, potentially sparking a financial crisis.
A growing chorus of economists is urging China to respond to the overheating economy by taking drastic measures such as raising interest rates and allowing a significant rise in the value of its currency, the yuan.
China's interest rates were boosted by 27 basis points in April to a new level of 5.85 per cent, in response to the earlier signs of overheating, but the hike failed to have any impact. (A basis point is 1/100th of a percentage point.)
The Chinese government has introduced a slew of austerity measures in recent months. It has tightened its restrictions on loans, made it harder to invest in new factories, and increased the minimum down payment for new house purchases. But the latest numbers suggest that these steps were ineffective.
Another key issue is the swift growth of China's trade surplus and its foreign exchange earnings. Its trade surplus is already above $100-billion and could climb as high as $150-billion by the end of this year. Its foreign exchange earnings, which have been soaring by 33 per cent annually, reached $941-billion by the end of June — the biggest such reserves in the world.
This will create more pressure on China to increase the value of the yuan, which is pegged to a basket of global currencies. Its currency was revalued by 2.1 per cent last summer, but the United States is leading the charge to force China to revalue the yuan again. Many economists believe the currency peg is keeping the yuan artificially low.
The government has repeatedly insisted that it will not make any sudden changes to the value of the yuan (also known as the renminbi).
Mr. Zheng Tuesday rejected any notion of a sharp increase in the value of the currency, despite pressure from speculators. “If anyone wants to play games with the renminbi, they won't benefit from that,” he said.
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