China Economy Continues To Boom But Growth Unbalanced

Booming exports and robust investment in China will ensure the world's fastest growing major economy will show even faster growth in the second quarter, economists said July 17. First half statistics due July 18 are expected to show that efforts to rein in investment and overheating have been ineffective while a record $14.5 billion trade surplus, already announced, will add to calls for a greater appreciation of the yuan.

"We forecast 10% GDP (gross domestic product) growth this year but the quality is lacking: too much liquidity and over-investment have led to excess capacity in many industries," Lehman Brothers said in a research note. "The recent tightening measures may have some short-term impact but to properly deal with liquidity, a stronger renminbi (yuan) and higher interest rates are needed," it added.

China grew 10.3% in the first quarter, surpassing the full-year 2005 growth rate of 9.9%.

On July 13, the official Securities Times reported growth of 10.9% for the three months to June, which it said should trigger tighter controls to slow things down.

Investment and trade remain the growth drivers despite government attempts to develop domestic consumption to balance the external sector. Last week, China's top planning commission announced that urban fixed asset investment rose 31.3% in the first six months of the year, picking up speed and further revealing the difficulties in reining in overheated sectors like property, steel and cement.

Besides posting the record $14.5 billion trade surplus in June, China's foreign exchange reserves rose $16 billion to reach $941.1 billion last month despite a 12.23% decline in actual foreign direct investment. "The large trade surplus is a clear reminder that, so far, China's policy mix is headed in the wrong direction," Merrill Lynch said in a note. "Without an exchange rate adjustment, the Chinese economy is destined to become more and more imbalanced," it said.

Copyright Agence France-Presse, 2006

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