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China Investment Slows a Bit, Momentum Still Solid

China's capital spending on assets such as flats and factories eased at the start of the year, providing more evidence of a modest slowdown in the world's fourth-largest economy.

But economists ruled out a relaxation of the tighter policies Beijing has been pursuing given that consumer inflation -- the highlight of this week's crop of data -- is at near-12-year highs.

Cranes stand on a construction site in front of newly completed apartment buildings in Beijing.
Greg Baker
Cranes stand on a construction site in front of newly completed apartment buildings in Beijing.

"My sense is that, barring a serious collapse in the global economy, the primary concern confronting policy makers in Beijing will be containing inflation," said David Cohen, an economist at Action Economics in Singapore.

"So the bias, in addition to raising interest rates, will be to tolerate a faster appreciation of the yuan as a way to restrain inflationary pressure," he added.

The People's Bank of China let the yuan rise on Friday as high as 7.0875 per dollar, the loftiest level since it dropped the currency's peg against the dollar in July 2005.

Fixed-asset investment in urban areas rose 24.3 percent in January and February from a year earlier, compared with a 25.8 percent increase in 2007, the National Bureau of Statistics said.

Economists had expected a rise of 24.0 percent.

The bureau did not issue separate figures for January and February because the timing of investment decisions is distorted by the Lunar New Year, which falls at different times each year.

The breakdown provided good news and bad news for policy makers worried that an ample supply of easy money is financing an investment binge that could saddle banks with new bad loans and create harmful overcapacity.

The pace of investment in real estate -- a magnet for speculative capital -- accelerated to 32.9 percent in the first two months from a year earlier.

Economists at BNP Paribas said this demonstrated the ineffectiveness of government measures to reel in the real estate market. "On the basis of these numbers alone, there is no reason to expect that monetary policy will soften or change," they said.

No New Measures

By contrast, spending on new investment projects fell 2.6 percent from a year earlier to 396.7 billion yuan.

That will comfort central bank chief Zhou Xiaochuan, who has voiced concern that a five-yearly reshuffle of local government officials now under way could lead to a repeat of 2003, when investment soared as the new appointees sought to make a mark by boosting growth.

Overall, Qu Hongbin, chief China economist at HSBC in Hong Kong, judged the report to be strong, especially given the bad weather that ravaged southern China in January and February.

"So the implications are that growth in total demand is still strong, which also means that policy tightening will have to continue," he said.

Comments by a deputy commissioner of the National Bureau of Statistics, Lin Xianyu, suggested that policy will mark time until inflation starts to recede.

"Now all the response measures have basically been applied, and for the time being there won't be many new measures," Lin told the China Securities Journal said.

He said consumer price inflation, which hit a near 12-year high of 8.7 percent last month, was likely to slow as government incentives to boost production of pork and other food kicked in.

Other reports this week also painted a picture of an economy that may be moving down a gear but is still solidly underpinned.

Industrial production for the combined January-February period rose 15.4 percent from a year earlier, a bit slower than forecast, while money and credit growth last month also undershot expectations.

Exports in February were surprisingly weak while imports were surprisingly strong -- a reflection, some said, of strengthening domestic demand that fueled a 20.2 percent rise in retail sales in the first two months, the fastest on record.

From a global perspective, the underlying robustness was a welcome counterpoint to the growing gloom in the United States, Cohen with Action Economics said.

"Despite the U.S. problems the data from Asia has continued to be pretty healthy, and that is attributable to the momentum in the Chinese economy," he said.