Beijing sweats as economy nears red zone

April 20, 2007

By Robert Saiget

Beijing - Chinese Premier Wen Jiabao had called for steps to prevent fast growth from leading to an overheated economy, the government said yesterday, as first-quarter gross domestic product (GDP) growth came in at a blistering 11.1 percent.

"We must ... prevent the economy from changing from rather fast-paced [growth] to overheating, while also avoiding large ups and downs," the government quoted Wen as saying.

Wen called for measures to rein in excessively fast growth in the nation's trade surplus to reduce "unreasonable" preferential policies for the export sector. China's trade surplus totalled $46.4 billion (R327 billion) in the first three months of the year, about double the figure in the same period last year.

Earlier yesterday, the National Bureau of Statistics (NBS) said that the first three months of 2007 showed the fastest growth rate since the second quarter of last year, when the economy expanded 11.5 percent.

"If the fast growth continues for a certain period, there is a risk of shifting from fast growth to overheating," said Li Xiaochao, spokesperson for the bureau, stoking concerns that a series of measures to cool down the economy had failed.

"We must carefully carry out all policies of the central government and continue to strengthen and improve macro-economic control measures."

Chinese share prices fell 4.52 percent ahead of the figures as investors opted to take profits on recent record gains rather than risk being exposed to bad news, while regional markets were also down.

The losses were the biggest one-day fall since February 27, when a near 9 percent plunge in Shanghai stocks sparked turmoil on global equity markets.

Analysts said acceleration in the world's fourth-largest economy was likely to have been driven by the yawning trade surplus and massive fixed asset investment.

The economy grew 10.7 percent in 2006, but had eased to 10.4 percent in the three months to December.

Analysts had expected the first quarter to come in at about 11 percent, well above the government's forecast of 8 percent for 2007 as a whole.

The acceleration has come about despite cooling measures adopted by the government since early last year, including interest rate increases and cuts in tax incentives for exporters.

"Investment and credit are rising fast and the trade surplus is large," said Ma Qing, an analyst with Citic Securities in Beijing. "As a result, the macro-control measures introduced so far have not had a big impact."

Paul Cavey, an economist with Macquarie Securities, said the key driver, fixed asset investment, had bounced back faster than expected from last year's moderation. "We were expecting growth to bounce back ... in the second quarter," Cavey said.

Total fixed asset investment - both urban and rural spending - rose 23.7 percent in the first quarter, the NBS said. Fixed asset investment, the main indicator of state-funded spending on new productive capacity, is fuelled by the country's massive liquidity despite systematic efforts by the central bank to mop it up.

China's consumer price index rose 2.7 percent in the first quarter of 2007 from a year earlier and was up 3.3 percent in March alone, the NBS said.

The government has an inflation target of 3 percent so the March outcome will be of concern. Consumer inflation is one of the key measures that the central bank monitors for policy decisions.

Industrial output expanded 18.3 percent, boosted by massive investment in new plant and equipment in recent years, alongside booming exports.

This was just one of several unsolved problems outlined by Li, including "an imbalanced balance of payments, excessive liquidity, an irrational economic structure, and high pressure on energy conservation and pollutant emissions reduction". - AFP