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UPDATED: April 24, 2007 NO.17 APR.26, 2007
In Full Flight
The ballooning Chinese economy and its strong first-quarter performance are encouraging, but making economists vaguely uneasy

Investing in the infrastructure

This year, Chinese investment has largely preferred infrastructure rather than its previous favorite of industrial production, said Tao, contending that it is good for the government to focus on infrastructure construction.

Currently, the Chinese Government has committed itself to substantial development projects, including the construction of a "new socialist countryside," the large-scale development of west China, inter-city railway construction and heavy investment in major metropolitan subway networks.

In the first two months of this year, China's fixed asset investment grew 23.4 percent compared with a year earlier and is expected to see further gains. After observing China's strong first-quarter growth, Tao revised CSFB's forecast for fixed asset investment from originally projected 17.5 percent to 23.2 percent.

Chu Jianfang, macroeconomy analyst with China Securities Research Co. Ltd., said that at present, a 23-percent or even possibly a 25-percent growth in fixed asset investment is reasonable, arguing that China is a big country and that dedication to infrastructure is for the benefit of the people.

Growing investment has triggered rapid bank loan increases. According to statistics from the People's Bank of China, financial institutions loaned about 1.42 trillion yuan ($1=7.73 yuan) in the first quarter, up 13.4 percent compared with the same period last year.

While banks increased their loan-giving pace, deposit growth rate slowed in the first quarter.

"As a matter of fact, China is undergoing negative interest rates," said Tao. "The bank deposits have constantly flown out of the banks and into the stock market and the real estate market." Currently, it is widely believed that investing in the stock market and the property market will bring more profit than waiting on bank interest, despite potential risks in the two markets.

Due to this, Tao assumed that the property market will be hot as even, but this projection is subject to policy changes.

Statistics from China Securities Depository and Clearing Corp. Ltd. show that by the end of April 13, total accounts in the Shanghai and Shenzhen stock markets had reached 89.2407 million, with 140,000 new accounts being opened each day.

In the first quarter, over 5.01 million new accounts were opened in China's stock markets. New accounts for all of last year were a mere 3.0835 million.

Also in the first quarter, paid-in foreign direct investments (FDI) rose 11.56 percent year on year despite a corporate income tax readjustment that had been assumed to pose a burden on foreign-funded companies. FDI grew all of 4.5 percent last year. Tao contended that FDI flow into China will increase in spite of tax policy changes, as China has become a world factory. Other emerging countries like India and Viet Nam will siphon off some FDI but won't pose a big threat to China, because of its cheap labor costs and relatively low land prices.

Structural surplus and foreign trade

According to Tao, the rapid growth in imports will continue in China-hovering about 21-25 percent-while a relatively low growth rate in exports can be expected around the 16-20 percent range. But since the base for exports is much larger than that of imports, China will again see a trade surplus mounting to over $208 billion, 17.7 percent higher than that of the previous year.

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