Investors In China Fuel Fast Expansion

Indicators Suggest Less Rosy Picture

HONG KONG, July 28 -- China's first initial public offering in nearly a year rose so high, so fast on Monday that regulators were forced to halt trading twice. The Hong Kong stock exchange's Hang Seng Index this week soared to double its low point last fall. And new lending on the mainland tripled to more than $1 trillion in the first six months of 2009.

While most other countries around the world struggle to stabilize their economies, China's appears to be rocketing back.

China's leaders say that the economy may have bottomed out in the second quarter of this year. The National Bureau of Statistics in China reported that gross domestic product, or the value of goods and services it produced, was up 7.9 percent in that period -- surprising analysts who had predicted growth rates to skid to as low as 4 percent. At this pace, China is on track to overtake Japan as the world's second-largest economy as soon as year's end.

But some secondary indicators contradict the picture of a miraculous comeback for China, economic analysts say.

Income tax revenue is plummeting, for instance. Profits of state-controlled companies are down nearly a quarter for the first half of the year. Wages are dropping in some areas. And credit card balances are rising.

In Hong Kong, the unemployment rate has remained high even as real estate prices have soared to the point where buying a home has become unaffordable for some middle-class earners. Approved loans jumped nearly 37 percent in June to $4.95 billion, a level higher than just before the Asian financial crisis in 1997.

There's a growing worry that the weaknesses in China's economy and Hong Kong's, which has become increasingly entwined with the mainland's, are similar to the problems the United States faced as its own crisis began: Consumers are overleveraged and banks are taking on too much risk, creating the potential for bubbles in stock and property markets.

"It is true the Chinese economy is recovering faster than in other parts of the world. But soaring capital prices are bringing unstable factors," said Dong Tao, chief regional economist for Credit Suisse.

China's central bank on Tuesday warned that inflation might rebound in the second half of the year. An increase in the price of food and consumer goods at this time could pose political challenges for the Communist Party, which has struggled to contain outbreaks of unrest driven by unemployment in its urban centers over the past year.

A cornerstone of China's $586 billion stimulus package that was rolled out last fall was pumping an eye-popping amount of government money into the economy. The value of loans China gave out in the first half of this year was similar to its gross domestic product during the same period. This type of "credit expansion hasn't been seen in the past 20 years," said Wendy M. Liu, head of China Research for ABN Amro.

Tao, a Hong Kong-based analyst for Credit Suisse, said that there's so much money that "enterprises and companies have no other places to invest it in the real economy.

"So they invest the money in buying lands and capital price soared. The credit is out of control now," he said.