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

Snow, at the moment, is the heart of the power problem. But in the longer term, the rolling cuts are the product of a clash between the power and coal industries over price and profits.

The state power companies have complained in recent years at the rising cost of the coal they buy to fire their generators. While coal prices have been largely deregulated, and become increasingly tied to global markets, power prices are still set by the government.

Added to this already volatile mix are two other issues: inflation, which hit an 11-year high in November; and a rise in global coal prices due to the flooding of mines in Australia and supply problems in South Africa.

Beijing has ordered price controls in recent months, including on power, in an effort to ensure that inflation, now confined largely to food, does not spread to the rest of the economy.

Global coal prices, in the meantime, have soared in recent months, by 50-60%, with the largest rise occurring in recent weeks because of the Australian floods.

As a result, many generators are short of coal, or had their power inventory cut to about four days, dangerously below the Chinese industry standard of two weeks to 20 days.

Beijing has now ordered coal companies to stop haggling over price and deliver the coal, which they are struggling to do via the country’s snow-clogged transport system.

But Beijing appears equally furious at the brinkmanship of the power companies. The suggestion is that the power companies’ tactics have backfired.
Source: Financial Times

We can expect forceful measures as Chinese President Hu Jintao has vowed to curb rising food prices and address a booming real estate market.

Hu Jintao said, ‘The central government attaches great importance to commodity prices and has made it an important task to stabilize them. A series of forceful measures have been taken and will continue to be taken to ensure the normal life of the masses.’

According to official statistics inflation hit an 11-year high of 6.9% in November. This was mainly caused by an 18.2% rise in food prices with pork up a staggering 56%.

Hu Jintao also vowed to curb rising housing prices to help low-income families and to provide them with better health care benefits, two other top concerns of ordinary Chinese.

He said, ‘The Party and government are very much concerned about the housing problem of the low-income masses.
‘The central government has made arrangements to speed up the low-rent housing system, improve the affordable housing system and ease the housing difficulties of urban low-income families.’

Hu made the comments as he visited a family at their small rental home in Tianjin and a retirement facility in the city.
Source: AFP