Economic growth in China fastest in a decade amid strains from boom

BEIJING (AP) - China says its economy grew at its fastest rate in a decade last year as the government struggled to contain the strains of an export-driven boom.
The economy grew by 10.7 per cent, moving China closer to overtaking Germany as the world's third-largest economy, according to figures issued Thursday by the government. It was the fastest growth since 1995, when the economy expanded by 10.9 per cent.

Spending on real estate and other assets soared despite government efforts to cool an investment boom that it worries could ignite inflation or a debt crisis. Consumer spending grew more slowly, suggesting Beijing still faces challenges in its effort to reduce reliance on exports and narrow its trade gap by boosting domestic consumption.

"Fast growth in itself is fine. It's more about the composition of growth," said economist Mingchun Sun of Lehman Brothers. "Investment needs to slow even faster. Second, there is an urgent need to reduce the trade surplus."

Analysts said they expect Beijing to raise interest rates again this year, following two hikes last year.

The government has imposed investment curbs on real estate, auto manufacturing and other industries and tried to restrain exports by levying new taxes on steel and other products.

Beijing has allowed the gradual rise of its currency to quicken in recent weeks in a move that could slow the growth of the trade surplus by making Chinese goods more expensive abroad. The yuan has strengthened by 0.5 per cent against the U.S. dollar since Jan. 1 after rising by about six per cent over the previous 18 months.

But the government says its efforts only began to take effect in late 2006.

"Outstanding problems still exist with the irrational relationship between investment and consumption, the imbalance of payments and excess liquidity in the banking system," the commissioner of the National Bureau of Statistics, Xie Fuzhan, said at a news conference.

In efforts to boost consumer spending, he said, "we are still not seeing significant results."

China's total economic output last year was 20.9 trillion yuan, the government said, or US$2.7 trillion at current exchange rates. Germany's output was $3 trillion, but its growth rate at 2.5 per cent was far below China's.

Chinese investment in real estate grew by 21.8 per cent while overall investment in assets was up 24 per cent, Xie said. Retail sales expanded by 13.7 per cent.

Consumer prices jumped by 2.8 per cent in December over the same month of 2005, compared with 1.9 per cent in November and an annual rate of 1.5 per cent for the full year.

Economist Stephen Green at Standard Chartered Bank said he expects inflation to stay at 2.5 to 3.5 per cent this year.

In a report to clients, Green said that might cause concern abroad about rising prices for Chinese goods, prompting central bankers to consider raising interest rates. But he said China is unlikely to "export inflation" because prices of exports are falling.

The government said this month its swollen global trade surplus jumped nearly 75 per cent in 2006 to a record $177.5 billion - equal to nearly 10 per cent of China's total economic output.

The flood of export revenues is straining Beijing's ability to keep inflation in check.

The central bank is draining billions of dollars a month from the economy, and has piled up the world's biggest foreign reserves, which stood at just over $1 trillion at the end of December.

Fourth-quarter growth slowed slightly, but not much. Output expanded 10.4 per cent in the three months through December, down from a decade-high 11.5 per cent in the second quarter to the third quarter's 10.6 per cent.

Incomes of urban Chinese households grew 10.4 per cent in real terms last year, while those in the countryside rose 7.4 per cent, the statistics agency said.

Rural incomes are "still at a comparatively low level," Xie said, though he stressed that compared with China's historic poverty, "this is a great leap forward."

President Hu Jintao's government has promised to spend more on aid to farmers and health, education and other services to spread prosperity to the countryside, home to 800 million people, most of whom have missed out on China's economic boom.

© The Canadian Press, 2007