Torrid China investment levels portend tighter monetary policy

With urban fixed-asset investment growth again approaching 30 percent, another interest-rate rise may be unavoidable.

BEIJING: China's spending on fixed assets like roads and power plants accelerated in the first five months of the year, prompting projections of an imminent monetary tightening to slow growth in the world's fourth-largest economy.

Urban fixed-asset investment rose 25.9 percent from a year earlier, picking up from 25.5 percent growth in the January-April period, the National Bureau of Statistics said Friday.

The number of new investment projects in the first five months was 74,701, an increase of 7,282 from a year earlier, the bureau said. Investment grew 30.3 percent in the first five months of last year and 24.5 percent in all of 2006.

Spending by industries producing nonferrous metals jumped 40.7 percent in the first five months from a year earlier, while real estate investment climbed 27.5 percent.

The increases underscore the government's failure to cool an economy that grew 11.1 percent in the first quarter. Wen Jiabao, China's prime minister, this week highlighted the risk of an investment rebound and signaled that the central bank may need to raise borrowing costs for a third time this year or further curb bank lending.

"The economy is absolutely booming and after a brief correction the stock market has taken off again," said Jing Ulrich, chairwoman of China equities at JPMorgan Chase in Hong Kong. "Clearly the central bank has a tightening bias after this week's economic data."

China raised borrowing costs and deposit rates on May 18, pushing the benchmark one-year lending rate to 6.57 percent and the deposit rate to 3.06 percent, still less than the inflation rate. The central bank has also ordered lenders to set aside more reserves five times this year.

The investment report capped a strong set of monthly data. China's trade surplus rose more than 80 percent in the first five months, industrial output surged 18.1 percent compared with a year earlier and consumer price inflation quickened to 3.4 percent in May.

Chris Leung, a senior economist at DBS in Hong Kong, said the authorities could tighten China's monetary policy at any time.

He said he expected the sixth half-point increase so far this year in the proportion of deposits that banks must hold in reserve as well as a 27 basis-point increase in bank deposit rates and a rise of 18 basis points in benchmark lending rates.

The People's Bank of China, the central bank, has already raised interest rates twice this year to rein in an economy that is on course to grow by double digits in 2007 for the fifth year in a row.

Chen Jijun, an analyst at Citic Securities in Beijing, said the cost of bank loans was simply too low. With profits strong, companies have every incentive to borrow to expand.

"I think the government will take swift measures in the near term," he said.

The government is likely to reduce or eliminate a 20 percent tax on interest income from bank deposits before raising rates, Frank Gong, an economist at JPMorgan Chase in Hong Kong, said Friday. That may help to stem the flow of money from household bank accounts to the stock market, amid concern that gains have been too fast and a bust is looming.