China Factory Spending Up 26% y-o-y

From Bloomberg this morning:

China's growth in factory and property spending unexpectedly accelerated, stoking speculation the central bank will raise interest rates for a sixth time this year to cool the world's fastest-growing major economy.

Fixed-asset investment in urban areas rose 26.9 percent to 8.9 trillion yuan ($1.2 trillion) in the first 10 months of 2007 from a year earlier, the statistics bureau said today. That beat the 26.2 percent median estimate of 21 economists surveyed by Bloomberg News. The pace was 26.4 percent through September.

The central bank may raise the benchmark one-year rate from 7.29 percent as early as today after inflation matched a decade high in October and the trade surplus widened to a record. Surging factory spending increases the risk that China, the biggest contributor to global growth, will be left with idle factories, job losses and a supply glut if export demand slows.

``Macro controls will strengthen because the government wants slower investment,'' said Liao Qun, chief economist at Citic Ka Wah Bank in Hong Kong. ``Add the high inflation number and the chance of an interest-rate increase today or this weekend has got much bigger.'' He expects borrowing costs to rise as many as two times before year's end.

China's key rate, at a nine-year high after climbing 1.17 percentage points this year, compares with 0.5 percent in Japan, 4.5 percent in the U.S., 5 percent in South Korea and 5.75 percent in the U.K.

The yuan was little changed at 7.4233 versus the dollar at 3:57 p.m. in Shanghai. The currency has climbed 11.5 percent since the end of a fixed exchange rate in July 2005. The CSI 300 Index of stocks fell 1.5 percent on speculation that rates will rise, paring the benchmark's gains for the year to 145 percent.

Bigger Than Brazil

Economists calculated the increase in fixed-asset investment for October alone was more than 30 percent.

Spending through October exceeded the gross domestic product of the economies of Russia, Brazil or India. Investment has quadrupled since 1996 when the data was first released. It accounted for 42.5 percent of China's GDP last year.

The nation's projects include a $65 billion facelift for Beijing that includes a new airport terminal, subway lines and roads for next year's Olympic Games.

Spending in the non-ferrous metal industry jumped 33 percent in the first 10 months. Investment in non-metal minerals soared 54 percent. The number of new investment projects was 191,086, an increase of 22,518 from a year earlier.

``The economy risks overheating and more needs to be done in monetary policy tightening,'' said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. ``There will be at least one more interest-rate increase this year and the central bank will be tougher in curbing loans.''

Borrowing Costs

The People's Bank of China is boosting this month the proportion of deposits that lenders must set aside as reserves to 13.5 percent, the most since at least 1987.

``A sharper-than-expected slowdown in global growth could curtail China's exports and expose the severity of its overcapacity problem,'' Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong, said in a report this month.

More than two-thirds of Chinese enterprises believe their industries have overcapacity, the state-run Xinhua News Agency reported Nov. 11, citing a government survey. Textile, pharmaceutical and equipment manufacturing were cited as examples.

China's economy may face ``a turning point'' if exports drop abruptly as a result of cooling overseas demand, Sheng Baofu, a Ministry of Commerce researcher, wrote in a Nov. 13 article posted on the ministry's Web site. Exporters mainly targeting the U.S. risk ``continuously shrinking'' orders, Sheng wrote.

Flood of Cash

That contrasts with government efforts now to tame the flood of cash from a trade surplus that reached $27 billion last month, stoking inflation, asset prices and investment.

Money supply grew 18.5 percent from a year earlier, exceeding the central bank's annual target of 16 percent for a ninth straight month. Consumer prices rose 6.5 percent on surging food costs.

China should raise rates and allow more currency appreciation, the World Bank said yesterday. Bigger yuan gains would staunch money inflows by pushing up export prices.

China is the biggest contributor to global growth this year, the International Monetary Fund said last month.