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China's scorching factory investment a 'worry'

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 few years.
"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 coming through."
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.
Bubble concerns grow; pressure increases for more economic cooling Chinese 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 U.S. economy.
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.

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