China Surge Fuels Fears of Overheating

China strengthened its claim to be the engine for global growth yesterday with new figures that showed its economy surged 9.1% last year.

The breakneck pace is the fastest in six years, adding to fears that excess investment and overproduction may be overheating the economy.

According to the national bureau of statistics, output swelled last year to 11.7 trillion renminbi (£780bn). China is now the world's sixth biggest economy and is on course to overtake Britain as the fourth largest within two years.

It has also become an increasingly important driver for business around the world. Although China accounts for just 3% of the global economy, it contributed more than 10% of growth last year.

Foreign investment hit $53bn (£29bn) as firms such as BP and BMW ramped up production in a country that is established as the workshop of the world.

Factories in the Guangdong province are churning out fridges, shoes and clothes for overseas markets at a record pace. Last year exports rose by 35%.

With new roads, bridges and housing under construction, the government estimates China consumed more than half the world's cement production and about a third of the steel.

Its people are more affluent despite a gulf between the prosperous eastern seaboard and impoverished inland regions.

According to the latest figures, the average disposable income of urban workers rose 9.3% last year to 8,500 renminbi, while rural dwellers had to make do with a 4.3% increase to 2,622 renminbi. But with 8.5 million new jobs and inflation still low at just 1.2%, officials stressed that the country was on course to achieve the government's primary goal of "xiaokang" (a prosperous society).

"When we look at the economic performance of 2003 we are very happy to see rapid economic growth, a stable consumer price index, an improvement in the employment situation and very good balance of payments," said Li Deshui, the chief of the state statistical bureau.

The growth rate seems little short of astonishing given the impact of Sars, which left streets deserted, airports empty and shopping malls silent for more than a month. But the economy has bounced back. In the last quarter of 2003, growth accelerated to 9.9%.

Questions are always raised about the quality of statistics in such a vast country, but analysts say the government is so concerned about overheating that it is more likely to have underplayed growth rather than exaggerated the rate of expansion. Worries that China's engine may be revving beyond its capacity have grown in recent months. Frequent power shortages suggest the national grid is struggling to meet the demand of fast-growing factories and a rising mid dle class that can now afford electric heaters and air conditioners.

In Shanghai, manufacturers were ordered last month to switch production to nights to ease the strain on the system.

Government leaders have warned that the real estate, concrete and auto sectors are reaching the point of overcapacity amid a glut of fixed capital investment, which rose by 27% last year. Much of this money will fail to show a return, adding to the pressure on a financial system that is widely seen as insolvent.

But with low inflation and an almost unlimited supply of cheap labour, the outlook still looks rosy. The government forecasts growth of 7% next year but most analysts say the real figure is likely to be much higher.