Chinese Investment Surges, Adding to Recovery Hopes

Chinese investment surged in May on the back of government pump-priming and a recovery in the property sector, providing fresh evidence that the world's third-largest economy is leading others on the path to recovery.

Investment in urban areas in fixed assets such as apartment buildings and roads rose 32.9 percent in the first five months from a year earlier, compared with a 30.5 percent rise in the first four months, the National Bureau of Statistics said on Thursday.

Economists said that translated into a 40 percent leap in May alone. Adjusted for inflation, the increase was even greater because Chinese prices have been falling for several months.

"I think this is a welcome sign of momentum building in the Chinese economy, and it's good for the global outlook," said David Cohen with Action Economics in Singapore.

The median forecast of economists polled by Reuters was for a rise of 31.0 percent, but the figure of 32.9 percent had been whispered in China's financial markets all week.

Given that rumors of Wednesday's inflation figures also proved to be spot on, the accuracy of the leak lends credence to talk in the market -- reported by two newspapers -- that data on Friday will show industrial production rose 8.9 percent in the year to May. That would be the sharpest rise since September.

The MSCI index of Asia Pacific stocks outside Japan was up 0.6 percent, adding to gains in global markets a day earlier in anticipation of a strong industrial production report.

Economists attributed the strength in investment to the government's 4 trillion yuan ($585 billion) economic stimulus plan, announced in November, and an associated record surge in credit growth from the state-dominated banking system.

Eugene Hoshiko / AP

The need for strong domestic stimulus was underscored by customs data showing that exports and imports fell in May from year-earlier levels for the seventh month in a row -- and at an accelerating pace.

"External demand remains weak as the U.S. and European economies are still contracting, so it'll be hard for China's exports to see a quick rebound," said Feng Yuming, an economist with Orient Securities in Shanghai.

Exports fell 26.4 percent from May 2008, while imports fell 25.2 percent, resulting in a trade surplus of $13.4 billion, compared with $13.1 billion in April and $18.6 billion in March.

Economists had expected a $14.8 billion surplus based on a 23.1 percent fall in exports and a 22 percent drop in imports from year-earlier levels.

After seasonal adjustment, however, exports rose 0.2 percent in May from April and imports rose 4.4 percent, customs said.

Moreover, Sherman Chan with Moody's Economy.Com in Sydney said trade flows today reflect orders placed several months ago, when the global economy was in dire straits.

"If you look back at, say, half a year ago, business sentiment was very, very weak and also household consumption was subdued around the world, which is why China's exports would have been weak," she said.

Investment, by contrast, is a better leading indicator. Here, economists saw much greater grounds for optimism.

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Spending on new projects surged 96 percent, while investment in railways soared 110.9 percent.

The real estate sector, which accounts for almost a quarter of fixed investment, saw growth of 6.8 percent in the first five months, up sharply from 4.9 percent in the January-April period.

Leading developers have been increasing their land purchases -- which are included in the investment figures -- as they judge that a recovery in property prices and transactions is durable after an 18-month slump in the sector. "The growth momentum of investment is really dramatic, and we expect that momentum to continue in the next two or three quarters," said Xing Zhiqiang, an analyst at China International Capital Corp, an investment bank in Beijing.

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