China 2006 investment growth slowed, pick up feared

Beijing, Jan 23: China's fixed-asset investment growth slowed modestly in 2006 but there is a serious risk it could pick up again because the economy is awash with cash, a senior planning official said on Tuesday.

Overall investment in fixed assets such as property, roads and factories grew about 24 percent in 2006, according to Han Yongwen, secretary-general of the National Development and Reform Commission (NDRC), China's main economic planning agency.

That compares with growth rates of 25.7 percent in 2005 and 26.6 percent in 2004.

In the first nine months of last year, overall fixed-asset investment, the main driver of China's double-digit growth of the past four years, was up 27.3 percent from a year earlier.

In a Webcast on the government's Web site, Han said the pressure for a rebound in capital spending stemmed from the money pouring into the economy from China's trade surplus, which grew 74 percent last year to a record 7.47 billion.

Local governments, banks and companies were all looking for investment opportunities to take advantage of the ample liquidity, he said.

''We feel the foundations of the results of our macroeconomic controls are not solid. There are some striking problems in the economy and there may be a rebound in investment, credit and the trade surplus,'' the official said.

But he said investment had not boiled over in some sectors as it had in 2003 and 2004.

Despite his fears of a resurgence in spending, Han made no mention of further restrictions in the pipeline, lending support to the view of many economists that Beijing has finished its administrative tightening for now.

Rather, Han said, the priority in 2007 would be to improve the implementation of existing investment curbs.

Property Market

The NDRC issued a raft of orders last year to head off excessively rapid capital spending, which Han said had been the root cause of China's economic problems over the years.

The agency clamped down on unauthorised land use, tightened the environmental protection criteria that projects must meet and sent inspectors to check compliance at local level.

Although Beijing weighed in by naming and shaming disobedient officials and provinces, Han said the steel, cement and aluminium industries still faced serious overcapacity.

The plate glass and lead and zinc industries also faced supply gluts after rapid capacity expansion last year, he said.

Turning to the property market, Han said the policy priority was to ensure stable growth and to avoid a boom-and-bust cycle.

Han traced Japan's lost decade of economic stagnation and the 1997/98 Asian financial crisis to the bursting of property bubbles.

Beijing is sensitive to popular criticism that the cost of buying a home is soaring beyond the reach of ordinary citizens.

Last year it ordered local authorities and developers to build more affordable housing instead of high-end properties that carry the fattest profit margins.

Han said efforts to stabilise the property market had achieved some success but conceded that they had not fully met people's expectations.

Retail sales in 2006 increased between 13 percent and 14 percent, Han said.

The National Bureau of Statistics will release the exact figure on Thursday along with GDP and other data for 2006. In the first 11 months, sales were up 13.6 percent from a year earlier.

In other comments, Han reaffirmed the government's commitment to increase the flexibility of the yuan's exchange rate and said it would aim to keep credit growth at a reasonable pace.

The People's Bank of China has not set a target for credit growth in 2007 and Han was not more specific.

He said the government aimed to reduce its budget deficit this year and to further cut the issuance of long-term infrastructure bonds this year from 60 billion yuan (.72 billion) in 2006.

Reuters