Firm China investment takes up slack from exports

BEIJING - China's capital spending beat forecasts in July, providing fresh evidence that firm domestic demand is sustaining the world's fourth-largest economy in the face of softening exports.

By (Reuters)

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Published: Fri 15 Aug 2008, 12:55 PM

Last updated: Sun 5 Apr 2015, 11:53 AM

Investment in urban areas in fixed assets such as roads and factories rose 27.3 percent in the first seven months of 2008 from a year earlier, compared with 26.8 percent growth in the first half, the National Bureau of Statistics said on Friday.

Economists, who had expected a 26.9 percent rise, said the year-to-date reading translated into a growth rate for July alone of 29.5 percent, the same as in June.

The report rounded out a week of data releases that painted a picture of economic resilience. China is cooling after five years of double-digit growth, but it is far from the dire straits in which the United States, Japan and the euro zone find themselves.

‘It will be an orderly economic slowdown in coming quarters. The market and the government might have been too negative about growth,’ said Kevin Lai, an economist at the Daiwa Institute of Research in Hong Kong.

Exports, though growing more slowly than last year, surprised on the upside in July, while retail sales smashed all records.

Only industrial output, crimped by factory closures aimed at cleaning up Beijing's air for the Olympics, disappointed.

‘With industrial production figures for July surprising on the downside on weakening exports and Olympics-related disruptions, the slight increase in fixed-asset investment will help alleviate concerns about the magnitude of China's economic slowdown,’ Jing Ulrich, chairman of China equities at JPMorgan Securities, said in a note to clients.

However, Ulrich said the headline figure, which measures investment in nominal terms not by volume, was probably exaggerated by higher prices.

China does not issue a regular investment deflator, but producer price inflation jumped to a 12-year high of 10 percent in the year to July on the back of increases in government-set prices for fuel and electricity.


If exports continue to wilt, economists expect Beijing to ratchet up public works spending in coming months, even if that risks bidding up the prices for steel and raw materials.

The government can easily afford to prime the pump -- it ran a budget surplus of 1.19 trillion yuan ($173 billion) in the first half -- and China's needs for better infrastructure are glaring, despite the striking impression that Beijing's new stadiums and skyscrapers are making on visitors to the Olympics.

Sichuan needs to rebuild after May's devastating earthquake, which killed at least 70,000 people, and power shortages are so severe that half of China's provinces are rationing electricity.

Sturdy retail sales and investment are exactly what China's policy makers want as they seek to reduce the economy's reliance on export-led growth.

‘Investment plays a very important role in expanding domestic demand and sustaining stable growth,’ said Wang Tongsan, a researcher at the Chinese Academy of Social Sciences.

China's trade surplus remains a source of friction with its trading partners and a headache for the central bank, which has to mop up the proceeds as they flow into the banking system to prevent excessive growth in money supply from fuelling inflation.

This week's data will have encouraged the central bank.

Growth in the broad M2 measure of money supply slowed markedly, while consumer price inflation fell to 6.3 percent in the year to July, well below February's peak of 8.7 percent.

Economists expect monetary policy to remain on hold -- the central bank last increased interest rates in December -- but they also say it is too early to contemplate a general relaxation even though banks' lending quotas have been raised five percent.

‘The strong fixed-asset investment reading in July makes any bold policy easing in the near term seem unlikely,’ Goldman Sachs economists Hong Liang and Yu Song said in a note.

The prospect of softening growth, no relief from monetary policy and a squeeze on profit margins as firms struggle to pass on rising input costs has deepened the gloom enveloping the Shanghai stock market, which fell this week to 19-month lows.

The stronger-than-expected investment figures provided some relief, however, sending the main index .SSEC up 0.87 percent by midday.

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