- The Washington Times - Thursday, January 25, 2007

BEIJING (AP) — First Germany. Next Japan and the United States.

China’s economy surged in 2006, moving it closer to overtaking Germany as the world’s third-largest economy. Now it may have No. 2 Japan and No. 1 United States in its sights, if it doesn’t succumb to the pitfalls of an overheated economy, such as soaring inflation and rampant debt.

China reported yesterday that its economy grew by 10.7 percent, according to figures issued by the government. It was the fastest growth since 1995, when the economy expanded by 10.9 percent.

Spending on real estate and other assets soared despite government efforts to cool an investment boom that it worries could ignite inflation or a debt crisis. Consumer spending grew more slowly, suggesting Beijing still faces challenges in its effort to reduce reliance on exports and narrow its trade gap by boosting domestic consumption.

“Fast growth in itself is fine. It’s more about the composition of growth,” said economist Mingchun Sun of Lehman Brothers. “Investment needs to slow even faster. Second, there is an urgent need to reduce the trade surplus.”

Analysts said they expect Beijing to raise interest rates again this year, following two increases last year.

The government has imposed investment curbs on real estate, auto manufacturing and other industries and tried to restrain exports by levying new taxes on steel and other products.

Beijing has allowed the gradual rise of its currency to quicken in recent weeks in a move that could slow the growth of the trade surplus by making Chinese goods more expensive abroad. The yuan has strengthened by 0.5 percent against the U.S. dollar since Jan. 1, after rising by about 6 percent over the previous 18 months.

But the government says its efforts only began to take effect in late 2006.

“Outstanding problems still exist with the irrational relationship between investment and consumption, the imbalance of payments and excess liquidity in the banking system,” the commissioner of the National Bureau of Statistics, Xie Fuzhan, said at a press conference.

In efforts to boost consumer spending, he said, “we are still not seeing significant results.”

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