China reports fastest growth in a decade amid strains from economic boom

BEIJING (AP) _ First Germany. Next Japan and the United States. <br/><br/>China's economy surged in 2006, moving it closer to overtaking Germany as the world's third largest economy. Now it may

Thursday, January 25th 2007, 10:33 am

By: News On 6

BEIJING (AP) _ First Germany. Next Japan and the United States.

China's economy surged in 2006, moving it closer to overtaking Germany as the world's third largest economy. Now it may have No. 2 Japan and No. 1 U.S. in its sights, if it doesn't succumb to the pitfalls of an overheated economy, like soaring inflation and rampant debt.

China reported Thursday that its economy grew by 10.7 percent, according to figures issued by the government. It was the fastest growth since 1995, when the economy expanded by 10.9 percent.

Spending on real estate and other assets soared despite government efforts to cool an investment boom that it worries could ignite inflation or a debt crisis. Consumer spending grew more slowly, suggesting Beijing still faces challenges in its effort to reduce reliance on exports and narrow its trade gap by boosting domestic consumption.

``Fast growth in itself is fine. It's more about the composition of growth,'' said economist Mingchun Sun of Lehman Brothers. ``Investment needs to slow even faster. Second, there is an urgent need to reduce the trade surplus.''

Analysts said they expect Beijing to raise interest rates again this year, following two hikes last year.

The government has imposed investment curbs on real estate, auto manufacturing and other industries and tried to restrain exports by levying new taxes on steel and other products.

Beijing has allowed the gradual rise of its currency to quicken in recent weeks in a move that could slow the growth of the trade surplus by making Chinese goods more expensive abroad. The yuan has strengthened by 0.5 percent against the U.S. dollar since Jan. 1 after rising by about 6 percent over the previous 18 months.

But the government says its efforts only began to take effect in late 2006.

``Outstanding problems still exist with the irrational relationship between investment and consumption, the imbalance of payments and excess liquidity in the banking system,'' the commissioner of the National Bureau of Statistics, Xie Fuzhan, said at a news conference.

In efforts to boost consumer spending, he said, ``we are still not seeing significant results.''

China's total economic output last year was 20.9 trillion yuan, the government said, or $2.7 trillion at current exchange rates. Germany's output was $3 trillion, but its growth rate at 2.5 percent was far below China's.

According to the CIA's World Factbook, Japan's GDP was an estimated $4.2 trillion in 2006, while U.S. output was a massive $12.9 trillion, based on a measurement that equalizes the purchasing power of different currencies.

Chinese investment in real estate grew by 21.8 percent while overall investment in assets was up 24 percent, Xie said. Retail sales expanded by 13.7 percent.

Consumer prices jumped by 2.8 percent in December over the same month of 2005, compared with 1.9 percent in November and an annual rate of 1.5 percent for the full year.

Economist Stephen Green at Standard Chartered Bank said he expected inflation to stay at 2.5 to 3.5 percent this year.

In a report to clients, Green said that might cause concern abroad about rising prices for Chinese goods, prompting central bankers to consider raising interest rates. But he said China is unlikely to ``export inflation'' because prices of exports are falling.

The government said this month its swollen global trade surplus jumped nearly 75 percent in 2006 to a record $177.5 billion _ equal to nearly 10 percent of China's total economic output.

The flood of export revenues is straining Beijing's ability to keep inflation in check.

The central bank is draining billions of dollars a month from the economy, and has piled up the world's biggest foreign reserves, which stood at just over $1 trillion at the end of December.

Fourth quarter growth slowed slightly, but not much. Output expanded 10.4 percent in the three months through December, down from a decade-high 11.5 percent in the second quarter to the third quarter's 10.6 percent.

Incomes of urban Chinese households grew 10.4 percent in real terms last year, while those in the countryside rose 7.4 percent, the statistics agency said.

Rural incomes are ``still at a comparatively low level,'' Xie said, though he stressed that compared with China's historic poverty, ``this is a great leap forward.''

President Hu Jintao's government has promised to spend more on aid to farmers and health, education and other services to spread prosperity to the countryside, home to 800 million people, most of whom have missed out on China's economic boom.