Two government think-tanks yesterday predicted China's economy would expand by 10.2 to 10.4 per cent in 2006, advising further interest rate hikes to prevent overheating.

Gross domestic product (GDP) may grow at 10.5 per cent in the first half of the year and 10.4 per cent for the whole year, according to a report from the State Information Centre.

The consumer price index (CPI), the major inflation barometer in China, may grow by 1.3 per cent in the first half of the year and 1.5 per cent or more in 2006.

But CPI growth should be controlled under 2 per cent this year, despite signs of faster growth in the second half of the year, according to Wang Yuanhong, co-author of the report and a senior researcher with the centre, an influential government think-tank in Beijing.

The economy as a whole will continue to be robust investment and the trade surplus are both expanding rapidly and consumption is strong too, Wang said.

The State Information Centre predicted a 30.6 per cent urban fixed-assets investment growth for the first six months and 29 per cent for the whole year.

The trade surplus is expected to expand to US$133.6 billion in 2006.

These factors may push authorities to take more tightening measures to prevent the economy from overheating, said Wang.

A further interest rate hike in the second half of the year is therefore likely and the central bank may also ask for even higher reserve requirements for commercial banks, he said.

The rates for mid- and long-term loans, in particular, should be increased substantially.

A report by the Academy of Macroeconomic Research under the National Development and Reform Commission also suggested the central bank further raise both lending and deposit rates by 0.25 of a percentage point at an appropriate time to squeeze liquidity of commercial banks and rein in excessive investment growth.

It anticipated a 10.4 per cent GDP growth for the first two quarters and 10.2 per cent for the year. CPI growth was estimated at 1.5 per cent this year, according to the report.

Excessive growth of money supply and overcapacity of some industries have become two major threats to economic stability in both the long and short term.

The central government is faced with the challenge of curbing the investment enthusiasm of local governments, which has led to a rapid increase of new project launches in the first six months of this year, the start of the 11th Five-Year Plan (2006-10).

It should adopt certain measures to cool down the economy and ensure a sustained long-term development, the report said.

Wang Yuanhong, with the State Information Centre, also said the central government should further tighten controls on land supply, in line with the credit curb, to moderate the investment growth.

But instead of a drastic policy adjustment, the macro control measures should be conducted "within a mild range," he said.

The authorities are still waiting to see the effect of the tightening methods already adopted, as there are often lags between monetary policy action and its impact on the economy.

The central bank, cautious of excessive lending growth since late last year, ordered an 0.27 percentage point rise of the benchmark lending-rate on April 28 and a half percentage point rise for the reserve requirements for commercial banks starting from July 5.

China's M2, the broad measurement of money supply that includes cash, savings and corporate deposits, grew by 19.1 per cent by the end of May, 4.4 percentage points higher than the same period a year ago. Outstanding renminbi loans also expanded by 16 per cent by then, 3.6 percentage points higher than a year ago.

Apart from interest rate rises, more specialized central bank bills may be issued to designated commercial banks to freeze liquidity if necessary, said Wang.

Besides investment and lending, other major concerns for the macro economy include a rapid growth of foreign exchange reserves (resulting from the mounting trade surplus and robust external demand), surging asset prices in housing and production materials, high consumption of energy resources and low efficiency in the application of resources, the State Information Centre report said.

It suggested the central government closely monitor investment activities initiated by local government and control the scale of urban construction. Local preferential policies should also be checked.

Source: China Daily