Oct. 23 (Bloomberg) -- JPMorgan Chase & Co. and Deutsche Bank AG raised their estimates for economic growth in China as a two- year push by Premier Wen Jiabao to encourage consumer spending begins to gain traction.

JPMorgan boosted its forecast for 2006 to 10.6 percent from 10 percent and said the economy may grow 9.5 percent next year, up from 9 percent previously. Deutsche Bank increased its 2006 estimate to 10.6 percent from 10.4 percent and its 2007 forecast to 9.5 percent from 8.9 percent.

Rising household spending may underpin growth as Wen curtails an investment boom that left China with idle steel and cement factories. A growing appetite among the 1.3 billion Chinese for cars and housing will help sustain expansion of about 10 percent, the State Council's Development Research Center said yesterday.

``Consumption will prevent the economy from slowing by a large magnitude,'' Zhang Liqun, a senior research fellow at the center, told a seminar in Beijing.

Growth in retail sales, a proxy for consumer spending, has averaged 13.5 percent this year, up from 12.9 percent in 2005. In September, sales increased 13.9 percent. The pickup came as overall economic expansion slowed to 10.4 percent in the third quarter from 11.3 percent in the previous three months.

``Retail sales reflect strong and growing household demand that is undeterred by the moderation in investment and the production sector,'' said Frank Gong, an economist at JPMorgan in Hong Kong.

Imbalances

Deutsche Bank economist Ma Jun said his raised estimate also reflects expectations that the government will loosen economic curbs after fixed-asset investment slowed in the third quarter.

China's economy has grown more than 10-fold since free-market reforms began in 1978, creating an estimated 300,000 U.S. dollar millionaires and spawning the world's biggest market for mobile phones, and the No. 2 car market. Average incomes among city dwellers have doubled over the past five years.

Even so, growth in consumption has lagged behind investment in factories and real estate, leading to imbalances that the World Bank says threatens the sustainability of China's expansion. Consumption last year accounted for the lowest share of gross domestic product since 1978, according to the statistics bureau.

A growth model tilted toward investment and exports has yielded widening inequality between coastal areas and the rural hinterland, as well as rampant pollution. More than 200 million Chinese live on less than $1 a day.

Boosting Welfare

``The ultimate purpose of economic growth everywhere is improvements in human welfare,'' Nicholas Lardy, a fellow at the Institute for International Economics in Washington, wrote in a report this month. ``By this standard, China is falling far below potential.''

Employment growth more than halved over the past decade to just over 1 percent per year even as China rose to overtake the U.K. as the world's fourth-largest economy in 2005, the International Monetary Fund estimates.

Against that backdrop, the government two years ago set out to bolster the living standards of poorer people. Wen has eliminated farmer taxes, raised minimum salaries and increased spending on social welfare and education.

Such improvements may help reduce the propensity of Chinese to save, unleashing pent-up demand for consumer goods, economists said. China's gross savings rate, at about 45 percent of GDP, is double the world average.

``Households in China save a lot because they have no confidence in the social safety net,'' said Richard Bush, a director at the Brookings Institution in Washington. ``They don't believe there will be money for pensions, for healthcare for education so they don't spend to the degree that a country at that level of development should.''

No. 2 Car Market

Slowing the accumulation of cash in bank deposits would also help cool lending for investment, which the government said last week is still growing too quickly. Bank deposit have jumped 70 percent over the past three years and reached a record 34 trillion yuan last month.

``Consumer spending is growing more quickly than consumer incomes and that suggests the savings rate may be falling, and that's good news,'' said Julian Jessop, chief international economist at Capital Economics in London.

Sales of passenger cars jumped by almost a third through September, helping China overtake Japan to rank behind only the U.S. Ford Motor Co., the world's third-largest automaker, doubled unit sales there during the period.

`Harmonious Society'

Wal-Mart, the world's biggest retailer, plans to double its number of stores in China by buying Trust-Mart, a unit of Taiwan's Chengda Group, for about $1 billion, people familiar with the proposal said on Oct. 17.

An added boon from accelerating spending would be an easing of China's record trade gap, which added fuel to the investment binge. The trade surplus accounted for 4.6 percent of GDP last year, up from 1.6 percent in 2004. It may exceed 6 percent of GDP this year.

China's ruling Communist Party renewed its pledge this month to build a ``harmonious society,'' a slogan used to underline the push to improve welfare.

``The initiative to build a harmonious society via increased spending on education, health and the social safety net should further increase households' disposable income for spending,'' said Ma of Deutsche Bank.

To contact the reporter on this story: Nerys Avery in Beijing at Navery1@bloomberg.net

Last Updated: October 22, 2006 23:41 EDT