China Hints at Plans to Cool Growth

A Chinese central bank policymaker warned yesterday that the country's interest rates may have to be raised for the first time in nine years to prevent investment growth from speeding out of control.

Against a backdrop of surging capital expenditure, fast expanding loans and rising consumer prices, the warning signals growing government concern about overheating in an economy that has contributed 25 per cent of global growth over the past five years.

Officials have been warning for months that over-investment in certain industries posed a risk, but the latest economic data has raised new anxieties about inflation, which hit an annual rate of 3.8 per cent in April, its highest level in seven years.

Amid predictions that inflation could hit 5 per cent next month, the central bank indicated that it was ready to intervene to avoid a recurrence of the double-digit rises that caused consternation the last time the economy overheated.

"If consumer prices become uncontrollable - rising above the bearable limit of 5 per cent - China may have to raise interest rates," said Li Yang, a member of the central bank's monetary policy committee, in yesterday's China Daily.

Since July 1995, the one-year lending rate has remained fixed at 5.31 per cent , but Mr Li said prices would have to remain over that level for several months before the central bank would take action because interest rates are not as effective a monetary tool in China as they are in developed countries. Policymakers are having to consider a wider range of options to cool an economy that grew by 9.8 per cent in the first quarter of this year.

In April urban investment and exports surged by more than 30 per cent as factories churned out an increasing share of the world's shoes, kettles and cars. Imports rose even faster - by 40 per cent - extending China's trade deficit for a fourth month.

While analysts welcome economic activity in efficient, profitable fields, they worry that excess lending has inflated a bubble in other sectors, which increases the risks to an extended banking system in which as many as half of all loans maybe bad.

The urban property market is one of the prime concerns. In the first three months of this year, the price of residential plots in Shanghai rose by 42 per cent , more than five times the national average. To cool this and other overheating areas - such as steel, cement and alu minium - the government has ordered banks to scale back their loans and banned investment in new projects.

With the economy increasingly decentralised and market-orientated, the government's policy brakes may not be as effective as in the past. The money supply has exceeded the central bank's target for 16 months in a row. Tax-dodging is also thought to be so widespread that some economists estimate half of the nation's output is unaccounted for by the official GDP figures.

The International Monetary Fund and credit rating agency Standard and Poor's are confident that the economy can be steered to a soft landing of about 7 per cent or 8 per cent growth this year. Having pumped an extra 10% into China last month, a lot of foreign investors appear to agree.