China Plans to Cut State Investment to Cool Economy

Nov. 6 (Bloomberg) -- China's government will trim spending next year, boosting state efforts to slow economic growth to a more sustainable pace, Vice Finance Minister Lou Jiwei said.
In the first eight months of the year, the central government's investment in roads, bridges and other fixed assets rose 4.3 percent to 501 billion yuan ($61 billion), according to the National Bureau of Statistics. Including spending by local governments and state-controlled companies, investment jumped 26 percent to 1.86 trillion yuan.
``We will reduce the size of the budget deficit and cut public investment,'' Lou said at a Beijing conference attended by senior government officials. ``The success we have achieved in adjusting economic growth is still preliminary and incremental.''
Expansion in the world's seventh-largest economy eased to 9.1 percent in the third quarter from 9.6 percent in the previous three months as the government restricted lending and investment. The central bank on Oct. 28 raised its benchmark interest rate for the first time in nine years and the State Information Center forecast growth will ease to 8.7 percent this quarter.
The government is trying to cool expansion in industries including autos, steel and cement it says are expanding too rapidly, clogging transport links and straining supplies of electricity and raw materials. Central bank Deputy Governor Li Ruogu said last month growth of 7 percent to 8 percent would allow for a healthy economy for the next two decades.
Investment
Growth is expected to slow to 8.5 percent next year from an estimated 9.3 percent in 2004, the State Information Center said in its 2005 China Industry Development Report, which was released at the conference. The center is a research unit of the State Development and Reform Commission, China's top planning body.
The median forecast of eight economists in a Bloomberg News survey this month was for growth to slow to 8.4 percent in 2005 from an estimated 9.2 percent this year. The economy grew a revised 9.3 percent last year, the fastest pace since 1996, as investment in factories, offices and other fixed assets surged 28 percent.
Investment increased 28 percent in the first nine months after jumping 53 percent from a year earlier in January and February. Growth may pick up again as government restrictions are having little impact, according to Wang Yu, deputy director of the monetary policy department at the People's Bank of China.
``Of 17.3 trillion yuan of projects that have been examined by the State Development and Reform Commission, only 1 percent have been cancelled,'' he said at the conference. ``Inflationary pressures still exist.''
Inflation
Fixed-asset investment will probably rise 21 percent this quarter and inflation is expected to average 3.8 percent, the State Information Center said in its report. Inflation is forecast to average 4 percent both this year and next, it said.
China's inflation rate fell to 5.2 percent in September from a seven-year high of 5.3 percent in each of the previous two months.
Retail sales, which the government is counting on to sustain economic growth as investment cools, rose 14 percent in September and will probably increase 13 percent this quarter, the State Information Center predicted. Consumer spending will probably account for 57.5 percent of gross domestic product this year, 2.1 percentage points more than in 2003, it said.
Export growth is projected to slow to 21 percent in 2005 from an estimated 31 percent this year and imports are likely to climb 23 percent after surging about 38 percent in 2004, the report said. The State Information Center forecast a $2.8 billion trade deficit for next year and a $4.5 billion surplus for 2004.
M2, the broadest measure of the money supply, is expected to increase 16 percent to 17 percent next year, it forecast. The indicator, which includes cash and all deposits, rose 14 percent in September, staying within the central bank's 17 percent target for a fourth straight month.
People's Bank of China's Wang said money supply growth is ``within a reasonable range.''