- The Washington Times - Tuesday, July 18, 2006

BEIJING (AP) — China reported its fastest economic growth in a decade yesterday and warned that booming construction and bank loans could spur inflation, raising expectations that Beijing might nudge up interest rates and possibly the value of its currency.

The 11.3 percent growth in the second quarter compared with a year ago exceeded forecasts. It came despite government efforts to cool off the sizzling economy by increasing borrowing costs and curbing investments after first-quarter growth hit an already strong 10.3 percent.

Exports also surged, but the government said consumer inflation stayed low at just 1.3 percent.

Economists said they expected Beijing to respond by raising interest rates for a second time this year and possibly allowing the currency, the yuan, to rise against the U.S. dollar, which could slow growth by making exports less competitive.

“There is an even stronger case for tighter monetary policy and yuan appreciation,” said Masahiro Kawai, an Asian Development Bank (ADB) economist, speaking at a briefing in Hong Kong.

China’s multibillion-dollar trade surplus has led to complaints that its currency is undervalued.

Beijing is under pressure from Washington and other trading partners to raise the yuan’s tightly controlled value, which they say is too low and gives Chinese exporters an unfair price advantage.

China ended its decade-old policy of tying the yuan directly to the dollar last July but has let it rise just 1.4 percent against the U.S. currency since then. And officials have publicly rejected pressure for sharp increases.

The government gave no forecast for full-year growth, but the ADB said it should be 10.1 percent. The official target is 8 percent, but Beijing often sets a low goal and revises it upward later in the year.

Chinese leaders want fast growth to reduce poverty, pay for reforms of state industry and create jobs for millions of laid-off workers, migrant laborers and new university graduates.

Beijing raised interest rates in April by 27 basis points to 5.85 percent and tightened lending standards. Regulators imposed curbs on new construction and reportedly are considering sharply limiting foreign investment in real estate.

Mr. Zheng said measures meant to avert financial problems are beginning to take effect, pointing to slower growth in bank lending and China’s foreign currency reserves.

But he acknowledged that construction was racing ahead, with the number of new projects begun in the first six months of the year up 22.2 percent from the same period of 2005.

The 11.3 percent growth rate is the highest for a quarter since the start of 1995, according to Lehman Brothers in Hong Kong.

Goldman Sachs economist Hong Liang, in a report to clients, said Beijing was expected to raise interest rates by another 27 basis points and reduce the amount of money available for bank lending.

Mr. Hong said she also expected China to widen the narrow band in which the yuan is allowed to fluctuate against the dollar, which could lead over time to a stronger currency.

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