Chinese investment quickens, fuels tightening talk

---

BEIJING, June 16 (Reuters): China's spending on fixed assets such as roads and power plants accelerated in the first five months of the year, prompting predictions of imminent monetary tightening to slow the world's fourth-largest economy.
Fixed investment in urban areas rose 25.9 per cent from a year earlier, picking up from 25.5 per cent growth in the January-April period, the National Bureau of Statistics said Friday.
The median forecast of economists polled by the news agency was for a rise of 25.7 per cent, although a government source familiar with the data had said it would be 25.9 per cent.
The report capped a strong set of monthly data. China's trade surplus rose more than 80 per cent in the first five months, industrial output surged 18.1 per cent compared with a year earlier and consumer price inflation quickened to 3.4 per cent. Money and credit growth was also strong.
Chris Leung, a senior economist at DBS in Hong Kong, said the authorities could tighten policy at any time.
"I think the possibility that they move today is actually high," Leung said.
Premier Wen Jiabao served notice after a meeting of his cabinet Wednesday that further monetary tightening and investment curbs were on the way.
Leung said he expected the sixth half-point increase this year in the proportion of deposits that banks must hold in reserve as well as a 27 basis point increase in bank deposit rates and a rise of 18 basis points in benchmark lending rates.
China traditionally moves interest rates in increments that are divisible by nine.
The People's Bank of China, the central bank, has already raised interest rates twice this year to rein in an economy that is on course to grow by double digits in 2007 for the fifth year in a row.
The Shanghai stock market took the speculation in its stride. The main index (^SSEC - news) recouped early losses to show a gain of 0.67 per cent in afternoon trading.
Companies fund more than half their capital spending from their own resources. But they also have strong incentives to borrow: bank loans cost only around 7 per cent even though the economy is expanding at close to 15 per cent in nominal terms and industrial profits are growing by over 40 per cent a year.
Chen Jijun, an analyst at CITIC Securities in Beijing, said the cost of capital was simply too low.
"I think the government will take swift measures in the near term," he said. "A rate increase could even happen today."
The quality of the investment figures, as with many other Chinese statistics, frustrates market economists. They are nominal, not inflation-adjusted; they include land purchases; and they include sales of second-hand capital equipment.
But analysts said the robust trend was clear enough to be of worry to policy makers who are determined to reduce wasteful investment, especially in sectors that consume a lot of energy and create a lot of pollution.
The details of the report contained both good news and bad news for China's planners.
Investment in non-metal minerals, including cement, leapt 52.6 per cent in the first five months, up from 48.3 per cent in the January-April period, suggesting an unwelcome acceleration in construction in coming months.
The tempo of real estate investment was barely changed in May, up 27.5 per cent in the first five months after a gain of 27.4 per cent in the January-April period.