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China May Sustain 9% Growth as Investment Shifts Inland

Construction takes place on a housing project in Chongqing. Photographer: Nelson Ching/Bloomberg
Construction takes place on a housing project in Chongqing. Photographer: Nelson Ching/Bloomberg

July 14 (Bloomberg) -- China may maintain growth of about 9 percent this year, avoiding a “hard landing,” as spending on low-cost homes and developing inland provinces counters the impact of Europe’s debt crisis and monetary tightening.

Investment by local governments and private businesses helped drive a 9.5 percent gain in second-quarter gross domestic product from a year earlier, the National Bureau of Statistics said in Beijing yesterday. That was faster than estimated as growth in industrial output and retail sales accelerated and copper and aluminum production reached records.

Investment accounted for more than half of the nation’s expansion in the first six months of the year and may offset threatened weakness in exports in the second half. At the same time, dependence on fixed-asset spending highlights limited progress in shifting to a more consumption-driven model that would play a bigger role in supporting global demand.

“I would be willing to increase my exposure to the Chinese economy,” said Fred Hu, chairman of Primavera Capital Group in Beijing and former Greater China chairman at Goldman Sachs Group Inc., adding that there are attractive opportunities with consumer goods, financial services and manufacturing stocks. “Equity valuations and investor sentiment have become overly bearish as markets got spooked about a hard landing.”

Industrial & Commercial Bank of China Ltd. has “very strong profit growth” with valuations converging to those of its Western peers, which “doesn’t make sense,” Hu also said.

Easing Asian Growth

Signs of easing Asian growth include Singapore reporting today that its economy shrank an annualized 7.8 percent in the second quarter from the previous three months.

Chinese shares tumbled 14 percent from mid April to late June in part on concern that measures to rein in consumer and property prices would cause a jump in bad loans and drop in growth rates. The benchmark Shanghai Composite Index, which has rallied almost 7 percent since then, was 0.2 percent lower at 2,789.65 at 1:26 p.m. local time.

The second-quarter increase in GDP compared with a 9.7 percent gain in the previous three months and the median estimate of 9.3 percent in a Bloomberg News survey of economists. The expansion came even after the central bank boosted lending rates five times since mid-October and lifted bank reserve requirements to a record.

‘Hard Landing’ Risk

“The economy is on track to grow about 9 percent this year -- a hard landing in 2011 looks very unlikely,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the Hong Kong Monetary Authority and the World Bank. “Investment will remain the driver for growth this year and in the next couple of years as rebalancing is a gradual process.’”

Fixed-asset spending, excluding rural households, rose 25.6 percent in the first half from a year earlier, yesterday’s report showed. GDP growth was 2.2 percent in the second quarter from the first three months of the year, the statistics bureau said, picking up from 2.1 percent in January to March.

Leaders from the Group of 20 have said a consumer-led China economy would help address global imbalances in spending and saving that could lead to another financial crisis. Excessive dependence on fixed-asset spending has restrained Chinese living standards, led to lower job creation and energy efficiency and contributed to environmental damage, Bank of Japan researchers Tomoyuki Fukumoto and Ichiro Muto wrote in a study this month.

Cheap Money

Chinese investment is financed in part by a “cheap cost of capital,” with policy makers keeping interest rates “far below the return on capital,” according to the BOJ working paper.

The benchmark one-year deposit rate is 3.5 percent, while the one-year lending rate is 6.56 percent, a spread that gives lenders the incentive to ramp up credit. With the consumer-price inflation rate at 6.4 percent, the return on deposits also leaves households’ savings eroded.

To bolster the role of consumer spending, China needs to embrace wage gains and address the “distortions” in the cost of capital, Fukumoto and Muto wrote.

Investment made up 5.1 percentage points of the nation’s first-half economic growth of 9.6 percent, the statistics bureau said yesterday. Private and public consumption accounted for 4.6 percentage points, and net exports shaved off 0.1 percentage points, said Sheng Laiyun, a spokesman for the agency.

UBS AG said yesterday that China’s growth may cool in the second half on export weakness, as unemployment in the U.S. and a widening debt crisis in Europe restrain demand.

Five-Year Plan

Local authorities are “enthusiastic on investment” as the nation begins a five-year economic plan running through 2015, Sheng told reporters. “China remains at a stage where industrialization and urbanization are accelerating,” he said.

Government spending on affordable homes and water facilities are filling a void left by a slump in railway investment this year.

Premier Wen Jiabao aims to build 36 million low-cost homes by 2015, an initiative that has added to concern that swelling debt at financing vehicles set up by local authorities will increase non-performing loans at the nation’s banks. The audit office estimated last month that local authorities’ liabilities at the end of last year were 10.7 trillion yuan ($1.65 trillion).

China will expand by as much as 9.5 percent this year, Yu Bin, director of the macroeconomic research department at the State Council’s Development Research Center, said at a briefing in Beijing today. The economy will need to grow at an annual average of about 9 percent through to 2015 to help make sure the risks from local government debt can be resolved, he said.

Going West

Investment at the local-government level climbed 28 percent in the first half to 11.7 trillion yuan, while spending overseen by the central government declined 3.8 percent, yesterday’s data showed.

The ruling Communist Party is also developing the central and western regions, left behind by export-powered growth in the east in the past three decades. Fixed-asset spending in central China grew 31 percent in the first six months of the year, and 29 percent in the west, compared with 23 percent in eastern regions, yesterday’s data showed.

Foxconn Technology Group, which makes Apple Inc. iPads and Dell Inc. computers at factories in China, is shifting production from coastal Guangdong province to central Henan and western Sichuan provinces where labor and land costs are lower.

Retail sales, which include purchases by companies and government agencies, expanded 17.7 percent last month from a year before, exceeding a median analyst estimate of 17 percent. Still, higher food, fuel and housing costs are eroding consumers’ spending power and curbing sales of some goods.

Inflation accelerated to 6.4 percent last month, the most in three years as food costs climbed 14.4 percent, the statistics bureau said last week.

Sporting goods companies including Li Ning Co., China’s biggest sportswear maker, and China Dongxiang Group Co. this month forecast declining sales.

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at; Zheng Lifei in Beijing at

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at

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