Chinese Growth Exceeds Forecasts

Rapid Rate Adds to Fear of Overheating

China's National Bureau of Statistics Director Zheng Jingping speaks during the Gross Domestic Product news conference in Beijing, China on Tuesday. (Natalie Behring - Bloomberg News)

SHANGHAI, July 18 -- China's economy grew at an 11.3 percent annual rate in the second quarter, the swiftest pace in a dozen years, the government announced Tuesday, heightening concerns that an unhealthy surge of investment is imperiling the country.

The rate exceeded by a full point the annual rate in the first three months of the year and overshot most expectations. The official target for the year is 8 percent. The rapid growth heightened fears that the government may not be able to slow the enormous economy.

"The structure of growth is unbalanced," said Ha Jiming, chief economist at China International Capital Corp., the country's largest investment bank. He noted that the economy is driven primarily by large construction projects. "The central bank has made some effort to cool the economy in recent months but it has been far from adequate," he said.

In May, China's State Council imposed controls to slow real estate development, crimping finance for new factories, office parks and villa complexes. But the number of construction projects begun in the first half of the year increased 22 percent from the second quarter of 2005, the government said.

Some analysts suggested that the surprisingly robust growth would lead to more stringent curbs, perhaps higher interest rates. In April, after announcing first-quarter growth figures, the People's Bank of China raised interest rates by a little more than a quarter of a percentage point, to 5.85 percent.

The growth figure is likely to intensify calls for China to increase the value of its currency, the yuan. Foreign manufacturers say China keeps the yuan at an artificially low exchange rate to make its exports unfairly cheap on world markets.

"We are concerned about the overheating situation in China," Masahiro Kawai of the Asian Development Bank said at a news briefing in Hong Kong. "There is an even stronger case for tighter monetary policy and yuan appreciation."

For three years, the prospect of overheating -- too-swift growth leading to excessive inflation -- has worried China's policymakers.

"Investment in assets is excessive, and there is an oversupply of loans," a spokesman for China's National Bureau of Statistics, Zheng Jingping, said at a news conference. "In the long run, these will cause inflation. The government will be on guard for inflationary pressures."

Concerns have centered on the real estate market, with worries that speculative investment has driven prices to absurd heights. A collapse in prices could leave China's rickety banking system with many bad loans in addition to the $500 billion worth it already has. A similar scenario in South Korea and much of Southeast Asia triggered an Asian financial crisis nearly a decade ago.

Several economists said Tuesday that overheating is not a major concern because prices have remained relatively flat. Consumer prices rose only 1.5 percent in June, the statistics bureau said, though that that was nearly double the increase for March.

"The overall story is that inflation in China is low," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai. "When you read these numbers, you don't want to panic."