http://online.wsj.com/public/article/SB115324732620910038-kfKa7AOPwCydhGbXEpuDG5FHX_c_20060725.html?mod=regionallinks
BEIJING -- A second-quarter acceleration of China's already-booming economy
underscores the mounting danger of runaway growth fueled by huge trade
surpluses, and it creates a number of thorny policy dilemmas for China's
leaders.
The National Bureau of Statistics said yesterday that the economy expanded at
an annual rate of 11.3% in the second quarter compared with the same period last
year -- a full percentage point faster than in the first quarter.
The second-quarter growth -- the fastest in any quarter in more than a decade
-- came despite official efforts to slow the pace by curbing investment, which
has exploded because of the cash generated by booming exports. The annual rate
of growth in the first half of 2006 was 10.9%.
The danger is that excessive investment will spawn overcapacity, leading to
falling profits and bankruptcies. That, in turn, could devastate Chinese banks
and cause the economy to stall -- a jolt that would be widely felt. The effect
of a Chinese slowdown would be magnified if, as many economists expect, U.S.
economic growth slows this year as interest-rate increases start to bite.
For Chinese leaders trying to contain excessive investment, the country's
currency poses a major dilemma. U.S. officials and others have pushed Beijing to
let the yuan appreciate faster -- an action that could curb exports of Chinese
goods by making them more expensive in dollar terms. China's main problem is
"the trade surplus, and behind the surplus it's the currency," says Hong Liang,
China economist for Goldman Sachs.
Beijing has been reluctant to allow any significant strengthening of the
yuan. Rather, it appears determined to drive ahead with a strategy to cool
growth by cutting investment. The next step, many economists believe, will be an
increase in bank lending rates, the second this year.
That policy will test Beijing's resolve to rein in local governments, whose
taste for extravagant construction projects is helping to drive the investment
boom. It also will pit the central bank against powerful state-owned commercial
banks that provide the money for much of that investment.
The root of China's imbalances is the money flowing in from export earnings.
June's trade surplus, a record $14.5 billion, sent the total for the first half
to $61.45 billion -- 54% bigger than in the year-earlier period. By year end,
China will likely have foreign-exchange reserves of more than $1 trillion, the
largest stash in the world.
As dollars flood into China, they are bought by the central bank in return
for yuan, a process that keeps the value of its currency stable but floods local
banks with cash. Big lenders such as Bank of China and Industrial &
Commercial Bank of China keep lending those funds -- the loans are the source of
most of their profits.
In the first half of 2006, China's fixed-asset investment in such things as
roads and factories surged 30% from a year earlier, yesterday's figures showed.
Industrial output in June was up 20% from a year earlier, compared with 18%
growth in May, while retail sales for June surged 14%. Inflation -- a looming
concern as the economy adds froth -- also is starting to creep higher. The
consumer-price index increased 1.5% in June after rising 1.4% in May.
In announcing yesterday's data, Zheng Jingping, spokesman for the statistics
bureau, characterized growth as "fast and stable." Nevertheless, he said,
investment in fixed assets was "excessive" and the supply of credit
"over-scaled."
Even if Beijing overcomes resistance from its local governments and
profit-driven banks, a strategy of curbing investment could actually exacerbate
the trade problem, many economists say. If the curbs damp China's demand for
goods such as steel and construction cranes, imports of those products would dry
up. At the same time, excess Chinese goods would pour into overseas markets,
widening its surplus. This is what happened after authorities clamped down to
fight overheating in 2003.
Chinese authorities have resisted letting the yuan appreciate to combat
excessive growth because they fear a rapid strengthening of the currency could
spawn bankruptcies by damaging exporters. Some Chinese farmers, too, might face
ruin if a stronger yuan encouraged demand for foreign-grown produce by making
imports less expensive. The yuan has strengthened only about 1.4% against the
dollar since it was revalued by 2.1% one year ago. One dollar now fetches about
eight yuan.
The alternative to a significant appreciation of the yuan, in recent months,
has been hastily prepared measures intended to reduce investment by curbing bank
lending. In April, the central bank raised benchmark one-year bank lending rates
by 0.27 percentage point.
There are signs such measures are beginning to have some effect. In June,
lending was up 14% from a year earlier, slightly less than May's 15%
rise.
