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Thursday, May 19, 2005

China Investment Overshoot Problem

This news *will* put the cat among the pidgeons: China’s urban fixed asset investment grew 25.7 per cent year on year through the first four months of 2005, overshooting the government’s 16 per cent target and increasing pressure on Beijing to further restrict over-investment in the property sector.

As the FT comments, this data following figures earlier in the week showing an unexpected 16 per cent year-on-year increase in industrial production in April offer evidence the government’s austerity programme has not succeeded in reining in lending and investment. Some response is to be expected from Beijing. Remember all that extra investment means increased capacity, and increased end-user oriented production.

Unless this slows, there will be an 'over-capacity' crisis in China, especially if protectionist measures continue to mount, and following that you could see capital exit from China: ie no dramatic rise in the value of the yuan. Troubling all round.

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