CHINA / National

Cooling measures take hold; economy slows down
Updated: 2006-07-24 10:30

China's economic growth, which reached the fastest pace in a decade in the second quarter, may slow as the government takes steps to clamp down on lending.

The economy will grow 10.4 percent this year, according to the median forecast of 26 economists surveyed by Bloomberg News last week, as growth in the last half of the year slows from 11.3 percent in the second quarter and 10.9 percent in the first half.

"Economic growth is likely to ease in the second half of 2006, reflecting the combined impact of earlier tightening measures as well as anticipated further moves to cool the economy," said Frank Gong, chief economist for Greater China at JPMorgan Chase & Co. in Hong Kong.

The government on July 21 restricted funds available for lending for the second time in two months to cool an investment boom the World Bank says increases the risk of an economic slump. The People's Bank of China will probably also raise interest rates for a second time this year to further curb spending, economists say.

The increase in the amount of deposits banks need to hold as reserves -- by 0.5 percentage point to 8.5 percent -- "is a monetary tightening measure and the impact will be felt by all sectors," said Wang Qing, head of economics and strategy for Greater China at Bank of America Corp. in Hong Kong.

Chinese stocks will probably extend declines made in the US after the reserve restriction was announced in Beijing late Friday. Aluminum Corp. of China sank 2.1 percent in US trading. Brilliance China Automotive Holdings Ltd. declined 1.4 percent to $15.24. Copper for delivery in three months fell 4.4 percent on the London Metal Exchange. The metal, of which China is the world's biggest consumer, is down 20 percent from a record $8,800 on May 11.


China's economy has grown 10-fold since Deng Xiaoping began free-market reforms in 1978, overtaking the UK as the world's fourth-biggest in 2005. Growth has been powered by exports, which increased to 38 percent of gross domestic product in 2005 from 23 percent in 2000, according to Robert Subbaraman, senior economist at Lehman Brothers Asia Ltd. in Hong Kong.

Exports helped triple the trade surplus to $102 billion last year and $61.5 billion in the first half of 2006. China's foreign- exchange reserves, the world's largest, jumped 32 percent from a year earlier to $941 billion at the end of June.

China has cracked down on lending at least four times since 1990 to cool bouts of overheating.

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