China's spending on fixed assets such as roads and power plants accelerated in the first five months of the year, prompting predictions of imminent monetary tightening to slow the world's fourth-largest economy.
Fixed investment in urban areas rose 25.9 percent from a year earlier, picking up from 25.5 percent growth in the January-April period, the National Bureau of Statistics said on Friday. The median forecast of economists polled by Reuters was for a rise of 25.7 percent, although a government source familiar with the data had said it would be 25.9 percent.
The report capped a strong set of monthly data. China's trade surplus rose more than 80 percent in the first five months, industrial output surged 18.1 percent compared with a year earlier and consumer price inflation quickened to 3.4 percent. Money and credit growth was also strong.
Chris Leung, a senior economist at DBS in Hong Kong, said the authorities could tighten policy at any time. "I think the possibility that they move today is actually high," Leung said. Premier Wen Jiabao served notice after a meeting of his cabinet on Wednesday that further monetary tightening and investment curbs were on the way.
Leung said he expected the sixth half-point increase this year in the proportion of deposits that banks must hold in reserve as well as a 27 basis point increase in bank deposit rates and a rise of 18 basis points in benchmark lending rates.
China traditionally moves interest rates in increments that are divisible by nine. The People's Bank of China, the central bank, has already raised interest rates twice this year to rein in an economy that is on course to grow by double digits in 2007 for the fifth year in a row.
The Shanghai stock market took the speculation in its stride. The main index recouped early losses to show a gain of 0.67 percent in afternoon trading. Companies fund more than half their capital spending from their own resources. But they also have strong incentives to borrow: bank loans cost only around 7 percent even though the economy is expanding at close to 15 percent in nominal terms and industrial profits are growing by over 40 percent a year.
Chen Jijun, an analyst at CITIC Securities in Beijing, said the cost of capital was simply too low. "I think the government will take swift measures in the near term," he said. "A rate increase could even happen today."
The quality of the investment figures, as with many other Chinese statistics, frustrates market economists. They are nominal, not inflation-adjusted; they include land purchases; and they include sales of second-hand capital equipment.
But analysts said the robust trend was clear enough to be of worry to policy makers who are determined to reduce wasteful investment, especially in sectors that consume a lot of energy and create a lot of pollution.
The details of the report contained both good news and bad news for China's planners. Investment in non-metal minerals, including cement, leapt 52.6 percent in the first five months, up from 48.3 percent in the January-April period, suggesting an unwelcome acceleration in construction in coming months.
The tempo of real estate investment was barely changed in May, up 27.5 percent in the first five months after a gain of 27.4 percent in the January-April period.
By contrast, the pace of investment in ferrous metals slowed markedly, hinting at success for the government in its campaign to consolidate the steel industry, according to Qian Wang, an economist with J.P. Morgan Chase in Hong Kong. Capital spending in non-ferrous metal smelting and processing also slowed, she noted in a circular for clients.
"The fast pace of investment in several non-ferrous metal sectors early this year, such as aluminium, has triggered a series of targeted administrative measures, including strict scrutiny of investment projects and loan applications, which have likely helped curb investment growth in these sectors."