Fixed asset investment picks up in China

Beijing, June 15:

China’s urban fixed asset investment picked up to 25.9 per cent in the first five months of 2007, official data showed Friday, amid expectations the government will act soon to slow its juggernaut economy.

That outcome compared with a 25.5-per cent increase in fixed asset investment — a key measure of mostly government spending on infrastructure projects — during the first

four months of the year, the National Bureau of Statistics said.

The data points to the continued strong pace of growth in the Chinese economy, especially in the real estate sector where the statistics bureau said investement grew by 27.5 per cent to 721.4 billion yuan (94.3 billion dollars).

Overall investment for the period was 3.20 trillion yuan while investment in new projects grew 6.1 per cent to 2.79 trillion yuan, it said.

A monthly figure for fixed asset investment in May alone was not provided.

“The reason behind the rise in investment is (corporations’) high profits,” said Zhu Jianfang, an economist with CITIC securities based in Beijing.

The data came after China’s government warned this week it was preparing for a new round of measures to cool an economy that roared ahead at 11.1 per cent in the first quarter after recording 10.7 per cent growth in 2006.

The growth levels well exceed the government’s official target of around eight per cent.

After other figures released this week showed exports booming, production rising and inflation ticking higher, Premier Wen Jiabao said the economy had to be cooled.

Monetary policy will be “moderately tightened” to ensure stable growth, Wen told a Wednesday cabinet meeting, with his comments widely expected to translate into a fresh round of interest hikes among other measures.

“The government is worried now about the continued uptrend of the growth, so there is

possibility that the economy could become overheated again,” said Shen Minggao, an economist for Citigroup in Beijing.

The central bank has already hiked interest rates twice this year and five times required commercial banks to place more money in reserve in an effort to cool inflation, fixed-asset investment and stock market speculation.

Goldman Sachs economist Liang Hong said aside from increasing interest rates, Beijing could enact a spate of other options, such as tightening land controls and stricter environmental standards.

An increase in export taxes on high-energy consumption products, as well as a cancellation of

tax on interest income to slow money being taken out of bank deposits, could also be on the cards, according to Liang.

She said China’s currency would also be allowed to appreciate faster while an increased issuance of central bank bills was likely to mop the excess liquidity in the financial system.

China’s attractiveness to investors and huge profits from factories shipping everything from textiles to electronics means the nation is flooded with cash, which in turn leads to looser credit and acceleration in investment.

“The main problem is related to the excess liquidity, which is largely driven by capital inflows from the trade surplus,” said Citigroup’s Shen.