China's scorching factory investment a 'worry'
Bubble concerns grow; pressure increases for more economic cooling
By Chris Oliver, MarketWatch / Last Update: 5:39 AM ET Nov 16, 2007
HONG KONG (MarketWatch) -- China's investment in factories, land and
other assets in urban areas surged 27% in the first 10 months of the year,
adding to concerns of a looming bubble in industrial spending and raising
pressure on the government to rein in investment.
Investment in fixed urban assets totaled 8.9 trillion yuan ($1.2 trillion)
in the January to October period, the statistics bureau reported on Friday.
The data cap a busy week of October statistics that showed surging retail
spending, robust industrial production and inflation nudging 11-year highs.
Economists said Friday's scorching factory-investment figures raised
concerns the economy could be heading for a deflationary bust if external
demand fails to soak up the capacity due to come online over the next
"At this rate of increase, it is worrying," said Standard Chartered
Bank economist Kelvin Lau in Hong Kong. "There is usually a time
lag between investments being made and the actual production capabilities
Lau said what's looming could be a huge price war as Chinese producers,
faced with slumping overseas markets, target their own consumers at a
time when billions of yuan worth of new production lines and logistics
and distribution systems become operational.
"There could be a lot companies losing out, closing down or potentially
going bankrupt," Lau said.
A report by China's commerce ministry warned a slump in U.S. imports of
Chinese-made goods could bring the mainland's rapid economic growth to
a halt, according to the Financial Times newspaper Friday.
authorities will be on watch for a global economic slowdown next year,
the FT reported, with the mood among the policy team pessimistic about
the chances of avoiding a serious downturn in Europe and the U.S. owing
to ongoing turmoil in credit markets. The ministry's report also cast
doubt on the theory Asian markets had decoupled from the fortunes of the
In Friday's trading in China, the Shanghai Composite Index fell 0.9% to
5,316.27. See Asia Markets.
Ben Simpfendorfer, an economist with the Royal Bank of Scotland in Hong
Kong, said there were few indications China's central bank was about to
move on interest rates, despite market rumors an announcement could come
Friday evening local time in Beijing.
"The People's Bank of China hasn't provided any signal this week
it is about to hike," Simpfendorfer said, adding the central bank
has tended to issue special short-term bills about a week in advance of
any changes to lending rates. Simpfendorfer expects the PBOC to lift rates
0.27-percentage point before year end.
Inflation data released earlier this week could already be pointing to
the lack of pricing power in some areas of the economy, Lau said.
The consumer-price index jumped 6.5% in October, matching an 11-year high
touched in August, as the cost of staples foods such as pork and vegetable
vaulted. Excluding food, inflation rose 1.1%, suggesting Chinese companies
are not passing on higher raw-material costs to consumers, and are instead
accepting lower profits to protect market share.
Lau added factory spending was the main driver behind Friday's fixed-asset
figures as investors continued to bet on rising demand for Chinese exports.
Standard Chartered expects China's central bank to lift interest rates
by 0.27 percentage point before year end, and to move twice more before
the end of the first quarter of next year.
Spending on the non-metals minerals industry jumped 53.5% to 215 billion
yuan in the first 10 months of the year, the National Bureau of Statistics
said. Investment in coal exploration rose 24.2% to 125.8 billion yuan,
non-ferrous metals surged 33.4% to 98.3 billion yuan and electric power
rose 9.4% to 601.7 billion yuan, the agency said.
Other government data released earlier in the week showed China's broad
money supply increased 18.7% in October, the highest pace this year, following
an 18.5% expansion in September. See emerging markets page.
Loans denominated in yuan climbed 17.6% for the month, accelerating from
a 17.1% rise in September.
The gains follow nine increases in the ratio of reserves banks must keep
on deposit with the central bank and five increases in lending rates.
Loan growth in the January to October period totaled 3.2 trillion yuan
($431.1 billion), an increase of 26.6% from the same period a year earlier.
On Thursday the statistics bureau said China's industrial output surged
17.9% in October, and had risen 18.5% in the first 10 months of the year,
up from a 14.7% in the year-earlier period.
October retail sales were 18.1% higher than a year earlier, the fastest
pace of growth this year, the statistics bureau said, For the first 10
months of the year retails sales expanded 16.1% to 7.21 trillion yuan.
End of Story
Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.