China's Factory, Property Investment Climbs 24.3%

China's Factory, Property Investment Climbs 24.3%

March 14 (Bloomberg) -- China's factory and property spending rose 24.3 percent in January and February, maintaining pressure on Premier Wen Jiabao to prevent the world's fastest- growing major economy from overheating.

Fixed-asset investment in urban areas rose to 812.1 billion yuan ($115 billion) from a year earlier, the statistics bureau said today. That was more than the 24 percent median estimate of 21 economists surveyed by Bloomberg News and the 23.4 percent pace in January and February 2007.

The worst snowstorms in half a century failed to prevent a 33 percent jump in spending on real-estate development. China may hasten gains by the yuan, raise interest rates and increase banks' reserve requirements after inflation in February accelerated to an 11-year high.

``China's economy is still very strong,'' said Sherman Chan, an economist at Moody's Economy.com in Sydney. ``The biggest challenge for policy makers this year is to cool inflation and at the same time to sustain growth and employment.''

A Bloomberg News survey of economists this week suggests rates and reserve requirements will rise this year. The yuan will gain 12 percent versus the dollar in the next 12 months, compared with a 7 percent increase in 2007, forward contracts indicate. Currency appreciation cuts import costs.

The yuan rose today to the highest level since the end of a fixed exchange rate in 2005. It traded at 7.0876 versus the dollar as of 12:06 p.m. in Shanghai from 7.0900 yesterday.

Blizzards, Monetary Policy

The investment numbers are the final data for January and February. Figures were distorted by the blizzards, making it harder to gauge the effects of what the government terms a ``tight'' monetary policy.

Inflation surged 8.7 percent in February from a year earlier. Producer prices, the cost of goods as they leave the factory, rose at the fastest pace in three years. Retail sales climbed by the most in nine years, partly on rising prices.

Weaker export growth illustrated the threat to China from a slowing global economy. Overseas shipments rose last month by the least in five years, cutting the trade surplus, as U.S. demand waned. Money-supply growth slowed. Industrial production expanded in the first two months by the least in a year.

``The underlying growth momentum of fixed-asset investment has been robust and stable,'' said Liang Hong and Song Yu, at Goldman Sachs Group Inc. in Hong Kong. The economists expect ``further tightening measures in the coming months.''

Property Spending

The acceleration in property investment from the 30.2 percent pace for all of 2007 is even after the government tightened land use rules, raised mortgage costs and increased down payments.

Spending on new investment projects fell 2.6 percent from a year earlier to 396.7 billion yuan -- probably because of the snowstorms, according to Qian Wang, an economist at JPMorgan Chase & Co. in Hong Kong.

China's economy, the world's fourth largest, grew 11.4 percent in 2007, the fastest pace in 13 years. The nation's investment demand has helped drive global prices of copper and iron ore to records.

Sinosteel Corp., China's second-biggest iron ore trader, made a hostile A$956 million ($905 million) takeover bid today for Australia's Midwest Corp. to secure supplies of the steelmaking material.

Reconstruction Work

Urban factory and real-estate spending, which rose 25.8 percent in 2007, will get a boost in 2008 from rebuilding after the blizzards. The appointment of local political leaders after the twice-a-decade Communist Party congress, held last October, may also lead to increased spending, as they start new projects.

Premier Wen told lawmakers last week that monetary policy is intended to tackle ``the strong possibility of a resurgence in fixed-asset investment.''

The government is concerned that untamed investment will lead to excess industrial capacity and too large a toll on the environment and natural resources.

Non-metal minerals investment surged 61 percent in the first two months from a year earlier, coal jumped 31 percent, and oil and natural gas rose 9.8 percent. Spending on electricity production fell 3.7 percent.

``Inflation has become hard to control as energy and commodity prices surge and China needs to import those raw materials for its booming economy,'' said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. ``What China needs is to allow its currency to appreciate faster to reduce costs.''

The People's Bank of China lifted borrowing costs six times in 2007 and has pushed banks' reserve requirements to 15 percent, the highest ever. The key one-year lending rate is 7.47 percent.

BLOOMBERG