China's Economy Soars 11.3%;
More Fiscal Restraint Expected
By ANDREW BROWNE
July 18, 2006; Page A2
BEIJING -- China's economy is picking up more speed, expanding by 11.3% in the second quarter of this year from a year earlier despite Beijing's efforts to slow the pace.
The figure released Tuesday by the National Bureau of Statistics highlights the failure of measures by Beijing to rein in expansion and avoid overheating. It is likely to dismay Chinese leaders who began clamping down more seriously after data showed the economy expanded by 10.2% in the first quarter. The first-quarter number was later revised to 10.3%.
For the first half of the year, the economy expanded by 10.9%. The Chinese economy is increasing by the fastest pace in roughly a decade.
The fear is that an overheated economy is producing excessive investment that could lead to industrial overcapacity, falling profits and, eventually, a crash caused by mass bankruptcies.
Many Chinese and foreign economists expect authorities will be forced to raise bank-interest rates for a second time this year, and issue more aggressive instructions to banks to curb lending. Reducing lending is the best way to bring down investment in a bank-dominated economy.
In releasing the data, statistics bureau spokesman Zheng Jingping characterized growth as "fast and stable." Nevertheless, he said in a statement that investment in fixed assets was "excessive" and the supply of credit was "overscaled."
One of the root causes of expansion is excess money in the economy, partly the result of trade surpluses with the U.S. and other trading partners. As dollars flood into China as payment for exports, they are bought by the central bank in return for yuan, a process that keeps the value of the yuan stable. Some of the surplus of yuan ends up being lent out by banks, swelling investment that is running far too hot.
The figures showed that fixed-asset investment increased by 30% in the first half of this year on a national basis. Industrial output for the month of June was up 20%. Retail sales for the month expanded 14% from the same month a year earlier.
Authorities have been comforted by the fact that inflation is low. Tuesday's figure shows that it is creeping up, with the consumer-price index in June up 1.5% from a year earlier after rising 1.4% in May.
In the first half of this year, banks have dished out 87% of the whole year's loan target set by the central bank.
Yet few economists believe Beijing is prepared to tackle the problem of easy money by allowing the yuan to appreciate more steeply, a move that could help narrow the trade surplus by making China's exports more expensive in dollar terms and its imports cheaper.
Last month's trade surplus hit its highest level ever of $14.5 billion, helping to balloon the surplus for the first half to $61.45 billion, 54% bigger than the surplus for the same period a year earlier. After tripling to $102 billion for the whole of last year, the surplus this year is on track to reach $150 billion or more.
The increasing surplus risks a protectionist backlash in Washington, where the Bush administration is pressing China to allow its currency to appreciate faster.
Beijing is scrambling to cool overheated parts of the economy, including property markets in several large cities, without derailing rapid expansion needed to create jobs. In April, the central bank lifted benchmark one-year bank lending rates by 0.27 percentage points to 5.85% from 5.58%. This month it raised the reserve requirement ratio for commercial banks -- the amount of money banks must deposit with the central bank -- by half a percentage point to 8%. For every $100 dollars of deposits, banks must set aside $8 in reserves, meaning the money can't be lent out.
Some economists believe another lending-rate increase of a similar magnitude is imminent. They speculate that it may be accompanied by a simultaneous increase in bank-deposit rates. That is because banks make most of their money from the difference between the low interest rates that they pay depositors and the higher rates they charge borrowers, and widening that so-called spread by raising lending rates might encourage banks to lend more.
But authorities are in a bind. If they raise interest rates sharply enough to cause a significant drop in lending, they risk attracting new inflows of speculative money betting that eventually the yuan will have to appreciate. Those inflows will add to liquidity in the domestic economy, undermining the effectiveness of the rate increases.
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