China's Investment Growth Shows Little Policy Impact

China's investment growth in August accelerated slightly, adding to concerns that Beijing's tightening measures have been ineffective in keeping economic growth in check.

China's urban fixed-asset investment in the January to August period rose 26.7% from the same period last year, accelerating slightly from the 26.6% growth in the first seven months, government data showed Friday. The government doesn't give a monthly growth rate, but Goldman Sachs estimated that investment growth accelerated to 27.3% in August from 26.2% in July. While the growth rate for the January-August period matched economists' expectations, the latest data follow government figures showing that the country had its fastest consumer price inflation rate since 1996 and its second-largest trade surplus ever last month, heightening concerns about the effectiveness of policy tightening "This round of macroeconomic controls has continued for over four years, the relevant agencies have introduced many policy measures, but the effects haven't been obvious," Communist Party mouthpiece the People's Daily reported Friday, citing discussions at a meeting of lawmakers on Aug. 29. The report was published before the national Bureau of Statistics issued the investment data. Xu Lin, the director of the National Development and Reform Commission's department of fiscal and financial affairs, was reported by Caijing Magazine on Thursday as saying macroeconomic controls implemented by the banking regulator and central bank have been insufficient in controlling China's economic growth. However, China's official stance is that the curbs have been effective. In its first-half report on China's gross domestic product, the National Bureau of Statistics said: "The government adopted a series of macro-control policies aiming at the outstanding contradictions and problems existing in economic performance, resulting in a steady and fast economic growth. But the People's Daily report, citing some members of the Standing Committee of the National People's Congress, said the government can't simply "treat the head when there's a headache and treat the foot when there's a footache," in a call for measures to treat the root causes of China's economic problems.

Further Tightening To Come

Further tightening is likely on the way, though it remains unclear how Beijing will adjust policy. Standard Chartered Bank economist Jason Chang said the People's Bank of China will likely use price tools, such as rate hikes, more aggressively in future, having already signaled a shift away from administrative measures by raising interest rates four times this year. "Rate tightening is on the way...it's a matter of time," he said, adding that the PBOC will likely raise interest rates this or next month. But Macquarie Securities economist Paul Cavey said the rhetoric over the ineffectiveness of macroeconomic controls isn't likely to herald a significant change in policy. This is due to an uncertain global economic outlook following problems in the U.S. subprime-mortgage sector, he said. Cavey, who expects two more interest-rate hikes in the remainder of this year, said China will likely remain reluctant to let the yuan appreciate more quickly to address the country's key problem, its undervalued currency. China's trade surplus adds to massive liquidity levels in the country, driving share and property prices higher and adding to easy credit and rapid investment growth. The NDRC's Xu was cited by Caijing Thursday as saying his personal view is the government ought to increase the flexibility of the yuan exchange rate system, and take further steps to loosen capital controls to alleviate excess domestic liquidity. Among Beijing's attempts to improve its macroeconomic control framework, China said Thursday it will formally start collecting dividends from firms owned by the central government starting from next year, moving the dividend-collection program past a trial phase. The collection of dividends from state firms could help Beijing slow investment growth by reducing the amount of funds companies have on hand for investment projects. In the first eight months this year, self-financed corporate investments rose 32.2% from the same period a year earlier, while investments financed by loans rose just 12.7%. Nevertheless, investment growth will likely remain steady, due to low real interest rates and a low base last year, said Chang of Standard Chartered.