China’s factory and property spending rose 24.3% in January and February which means the government has to do something to prevent the world’s fastest-growing major economy from overheating.

The worst snowstorms in half a century failed to prevent a 33% jump in spending on real-estate development. Options are now to hasten gains on the renminbi, raise interest rates and increase banks’ reserve requirements.

Fixed-asset investment in urban areas rose to RMB812.1 billion ($115 billion) from a year earlier, the statistics bureau said today. That was more than the 24% median estimate of 21 economists surveyed by Bloomberg News and the 23.4% pace in January and February 2007.

Sherman Chan, an economist at Moody’s Economy.com in Sydney, said, ‘China’s economy is still very strong. The biggest challenge for policy makers this year is to cool inflation and at the same time to sustain growth and employment.’

A Bloomberg News survey of economists this week suggests rates and reserve requirements will rise this year. The renminbi will gain 12% versus the dollar in the next 12 months, compared with a 7% increase in 2007, forward contracts indicate. Currency appreciation cuts import costs.

Premier Wen told lawmakers last week that monetary policy is intended to tackle ‘the strong possibility of a resurgence in fixed-asset investment.’

The government is concerned that untamed investment will lead to excess industrial capacity and too large a toll on the environment and natural resources.

The People’s Bank of China lifted borrowing costs six times in 2007 and has pushed banks’ reserve requirements to 15%, the highest ever. The key one-year lending rate is 7.47%.
Source: Bloomberg