(Bloomberg, Oct 19, 2006)--China's economic growth slowed for the first time in a year as Premier Wen Jiabao curbed investment to keep the world's fastest-growing major economy from overheating.

Gross domestic product in the third quarter increased 10.4 percent from a year earlier after expanding 11.3 percent in the previous three months, the statistics bureau said in Beijing today. Second-quarter growth was the fastest in a decade.

China restricted bank lending and project approvals to bring about a gradual slowdown in an economy that accounts for about a tenth of global growth. Wen must now turn his attention to stemming a soaring trade surplus that fueled China's spending binge and drove foreign exchange reserves to almost $1 trillion.

``The near-term data is headed in the right direction, but the medium- and long-term problems haven't been resolved,'' said Daniel Hui, an economist at JPMorgan Chase & Co. in Hong Kong. ``We will continue to have large trade surpluses and foreign exchange accumulation.''

The yuan was little changed at 7.9086 against the dollar as of 11:20 a.m. in Shanghai. Third-quarter economic growth matched the median forecast in a Bloomberg News survey of 27 economists.

A four-year investment boom has powered annual economic expansion of 10 percent -- double the global average -- and last year vaulted China past the U.K. as the world's fourth-largest economy. It's also created overcapacity that may drive prices lower, hurting profits and threatening the ability of companies to repay loans, the World Bank says.

Foreign Reserves

The $30-million-an-hour pace of growth in China's foreign exchange reserves took them to $988 billion at the end of last month. The trade surplus reached $110 billion through September, already exceeding last year's total, and economists forecast the gap will widen to more than $150 billion this year.

Fixed-asset investment in towns and cities rose 28.2 percent from a year earlier in the first nine months, easing from 29.1 percent growth through August, reflecting investment curbs and higher interest rates. The rate has been falling since June.

China must maintain controls over medium and long-term lending and investment, Wen said yesterday. He also vowed to tighten rules on land sales, cut pollution, improve public finances and cap surging real estate in all major Chinese cities.

``The results of the macro-economic controls need to be further consolidated,'' said Li Xiaochao, a spokesman at the statistics bureau, told reporters in Beijing. ``Structural problems are still prominent.''

Threat to Banks

China had 118 million tons of excess steel production capacity last year, more than the entire 112 million-ton output of Japan, the world's second-largest steelmaker. There is also surplus capacity in areas including autos, cement and coking coal.

``Excess capacity is so large in some industries that their ability to service their debt is in question,'' threatening to push some banks into insolvency, Nicholas Lardy, a fellow at the Institute for International Economics in Washington, said in a report this month.

Premier Wen is encouraging China's 1.3 billion people to increase spending to sustain demand and underpin employment as the government attempts to rebalance the economy away from investment and exports. Consumption last year accounted for the lowest share of gross domestic product since 1978, according to the statistics bureau.

Since April, Wen imposed curbs on land use and new project approvals, shuttered investments that flout government guidelines and ordered banks to slow lending. The central bank raised interest rates twice, forced banks to set aside more money as reserves and stepped up measures to drain funds from the financial system through bond sales.

`Part of Solution'

Money supply grew 16.8 percent in September, the slowest pace in more than a year, the central bank said last week. China will continue raising interest rates, Li said.

Allowing faster currency gains would help China stem its trade surplus and choke off investment funding, said Huang Yiping.

``A more flexible exchange rate should be part of the solution,'' said Huang, chief Asia economist at Citigroup Inc. in Hong Kong. ``The structural imbalances in the economy are an issue China is going to have to address.''

As the central bank issues yuan to buy dollars and keep the exchange rate stable, it increases the amount of cash in the financial system, encouraging banks to lend. The rate on seven-day loans between banks has slipped to 2.6 percent from 2.89 percent on Aug. 10, reflecting the increase is funds available.

Consumption Push

The government has limited yuan gains to 2.6 percent since easing a peg to the dollar in July 2005. One of its biggest concerns is the potential loss of export jobs resulting from a higher currency, which could lead to unrest among laid-off urban employees and China's millions of migrant workers.

While curbing investment, Wen has cut taxes, raised minimum wages and civil servants' salaries to encourage spending. The national savings rate is about double the world average, the Organization for Economic Cooperation and Development estimates.

Retail sales in September rose 13.9 percent from a year earlier, the most since January, today's report said. Wal-Mart Stores Inc. plans to spend about $1 billion to double its stores in China by acquiring Trust-Mart, a person familiar with the proposal said Oct. 16.

Source:Bloomberg
tag:China economy