China investment slows a touch, tightening expected

The pace of Chinese capital spending slowed a touch in the first seven months of the year, but not by enough to dispel expectations of further policy tightening to cool the world's fastest-growing major economy.

Investment in urban areas in fixed assets such as flats and factories grew 26.6 percent between January and July, a bit below forecasts of a 27.0 percent rise and the first-half growth pace of 26.7 percent.

Coming a day after a similarly modest slowdown in factory output growth, the figures suggested to economists that there is no urgent need for the central bank to slam on the brakes.

"Taken together with lower July industrial production, it supports the case that China is not overheating," said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.

But investment was hardly weak. Capital spending in primary industries - sectors such as chemicals and smelting that are under government scrutiny because they pollute a lot and guzzle energy - jumped 46.2 percent in the first seven months.

Investment growth in real estate accelerated, and the overall number of new investment projects picked up smartly.

"The central bank will definitely raise interest rates again before the end of the year, maybe next month," said Xue Hua, an analyst with China Merchants Securities in Shenzhen.

"There's still an upside risk to investment, and the authorities will strengthen the implementation of administrative orders to curb loans to polluters," he said.

The Shanghai stock market <.SSEC>, which rarely reacts much to economic data, was down 2.04 percent at midsession. It had already fallen 1.74 percent before the figures came out.

RATE RISE TIMING

The investment figures rounded out China's main statistical releases for July. All in all, the reports showed an economy maintaining exceptional momentum, according to Huw McKay, a senior international economist with Westpac in Sydney.

"The third quarter has begun as the second quarter ended. The trade surplus remains enormous, money supply remains elevated, food prices are pushing headline inflation higher and the industrial and investment sectors continue to resist gravity. Our full-year growth forecast of 11.4 percent may yet prove to be conservative," he said in a report.

Consumer price inflation spurted to a 10-year high in July of 5.6 percent. That means savers, who earn 3.33 percent on one-year certificates of deposit, are seeing the real value of their money shrivel if they leave it in the bank.

Economists said this alone would be a reason for China to raise interest rates for the fourth time this year.

"Coming on top of the inflation data earlier in the week, it would seem to suggest the central bank will be looking to raise the lending rate and maybe the reserve ratio as well in the near term," said Tai Hui, an economist at Standard Chartered Bank in Hong Kong.

The reserve ratio is the proportion of deposits that banks must tie up in reserve with the central bank instead of lending. It has been increased nine times in just over a year as the People's Bank of China has battled to mop up cash pouring into the banking system from the country's record trade surplus.

Hui thought a rate rise this week would be a bit rushed, given that the last one was announced as recently as July 20.

"But we're moving to a sensitive time ahead of the party congress and we'd expect a move before the end of the third quarter," he said.

Hui was referring to the five-yearly congress of the ruling Communist party, expected in mid-October.

Whereas some economists believe stability in policy will be the watchword in the run-up to the gathering, Simpfendorfer said the meeting need not stay the central bank's hand.

"If inflation expectations are rising, it aggravates social tensions and so it would make sense in fact to tighten policy going into the congress," he said.