By Jason Simpkins
Investment in China’s fixed assets – factories, property and equipment – increased 26.6% in the first seven months of 2007, fueling concerns that China’s national economy could overheat.
In a related development, inflation has reached a ten-year high, putting even more pressure on China’s central bank to raise interest rates, and slow the economy, before it over-revs and stumbles. Most of its efforts in this area have been half-hearted, as the government is afraid of blunting the continued advance.
According to China’s statistics bureau, fixed-asset investment rose to $747 billion, close to a 26.7% increase. The total growth of all fixed asset investment was 24.5% in 2006. Through January and July of this year, there were 132,099 new investment projects, 17,168 more than a year ago. Total investment in property development has grown by 28.9% this year.
The investment rate has been bolstered by a major government push to prepare for the 2008 Summer Olympic Games, which China views as a chance to showcase its progress to the world. For that reason, it’s no surprise that the event has been the driving force behind investment in the nation’s infrastructure.
China is expected to spend more than $400 billion through 2010 on infrastructure projects. The 2008 Olympics alone will cost Beijing about $40 billion, compared to the $12 billion Athens spent on the 2004 Olympics.
However, the risk of China’s economy overheating is very real. The market grew 11.9% in the second quarter year over year. The nation’s money supply grew 18.5% in July, and the rate of inflation reached 5.6%. It is now at its highest point in 10 years.
Investment accounted for 42.7% of the country’s Gross Domestic Product last year. By comparison, investment only accounted for 23.9% of GDP in Japan, 20.2% in the United States and 17.45% in Germany, according to the International Monetary Fund.
Even China’s own Premier, Wen Jiabao, has admitted that this rate of growth is unsustainable. At a press conference in March he said, “China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced.” The nation’s trade surplus rose 67% in July alone.
According to remarks made by Zhang Tao of the People's Bank of China, in the official China Securities Journal, “economic growth is overly fast and it has been so continuously.” He, too, pointed at the rapid rise of GDP, fixed-asset investment, inflation and lending, saying that China “may have entered a dangerous zone.”
So far, Beijing has ignored worldwide appeals to allow the Chinese Yuan to appreciate in value, which would make China's exports more expensive and slow the inflow of cash. The Yuan has risen about 9% against the dollar since a fixed-exchange rate ended in July 2005. The CSI 300 Index has climbed about 130% this year, after more than doubling in 2006.
In an effort to restrain the runaway economic growth, China’s central bank will no doubt soon be forced to raise interest rates for the fourth time this year. Late last month, the People’s Bank of China raised both the one-year deposit and one-year loan, interest rates by 27 basis points to 3.33% and 6.84% respectively.
A fixed asset investment growth rate of more than 26% shows that much of the money being generated is being put back into substantial long-term assets, but the central bank faces a tall order if it’s to keep the economy in check. All that capital acts as fuel for China’s economic engine. But China seems all too willing to run that engine right at its redline, and is reluctant to ease up at all on the accelerator as it races toward the Olympic Games, a milestone in the country’s modern history.