China investment pace eases but economy stays strong

By Alan Wheatley and Langi Chiang

BEIJING (Reuters) - Chinese investment in fixed assets such as property and factories slowed slightly in April but not by enough to alter the picture of a sturdy economy that is holding up well in the face of stiffening global headwinds.

Spending on fixed assets in urban areas rose 25.7 percent in the first four months from a year earlier, compared with a 25.9 percent increase in the first quarter, the National Bureau of Statistics said on Thursday. Although the reading was a touch below market forecasts of a 26.2 percent rise, there were fewer working days this April than in April 2007 because of changes to China's schedule of public holidays.

"It seems that significant momentum is being sustained in the Chinese economy despite all the global uncertainties," said David Cohen with Action Economics in Singapore. "China remains a key engine of growth for the world economy." The bureau did not issue data for April alone, but Goldman Sachs economists calculated that investment in the month was up 25.3 percent from a year earlier, against 27.3 percent in March.

"We believe the underlying growth momentum of fixed-asset investment has been robust," Yu Song and Hong Liang told clients. Policy makers have been trying to prevent over-investment, fearing an ample supply of easy money could fuel wasteful spending that might saddle banks with new bad loans.

A particular concern is real estate, where investment in the January-April period rose a strong 32.1 percent. Projects that consume a lot of energy and spew out pollution are also attracting close scrutiny. But Beijing wants to avoid too sharp a slowdown in investment, which has been the main driver of China's double-digit growth in recent years.

Beijing instead is trying to redirect spending towards the interior and to sectors where China still has great needs, such as affordable housing and rural infrastructure.That focus will sharpen given the need for reconstruction after this week's devastating earthquake in southwestern China and fierce winter storms that badly damaged transport and power supplies across southern China in January and February.

"There is a high possibility that investment will rebound in the second half," said Tang Jianwei, an analyst at Bank of Communications in Shanghai."Reconstruction after the snow disaster and earthquake will also drive investment growth, as you can see that many houses and roads were destroyed in the earthquake in Sichuan," he said.

LOOKING STRONG

The investment report was the last of China's major economic indicators for April.
In the round, they showed an economy that is proving resilient to tighter domestic policy and a slowdown that is spreading from the United States to other industrial economies.

Growth so far this year had been stronger than expected, the central bank said in a report issued on Wednesday. Annual export growth slowed to 21.8 percent in April from 25.7 percent in all of 2007, and factory output increased by less than expected because analysts had not taken account of the reduction in working days in April. But imports were strong and retail sales surged by a record 22 percent from a year earlier, comforting policy makers who are trying to stoke domestic demand and reduce the economy's reliance on exports and related investments.
The main cloud overhanging the economy is inflation, which, at 8.5 percent, is near 12-year highs. Strong money and credit growth in April mean the central bank, as it said in Wednesday's report, cannot yet afford to relax its tightening stance.

"It looks like policy makers are probably still going to have to pay attention to inflationary pressure as their most important economic priority," Cohen said. "We still are looking for some increases in interest rates together with continued toleration of a somewhat stepped-up appreciation of the yuan," he added. But the comments of senior officials suggest they are hopeful that the surge in food costs, which has been solely responsible for the spike in inflation, will soon abate. Indeed, fresh food prices fell 1.6 percent in the week ended May 11, according to the Ministry of Commerce.

"Although we are confronted by widespread price increases, there will be no hyperinflation," deputy central bank governor Su Ning said in Beijing on Thursday.