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China Parliamentary Committee Warns Economy Overheating


A legislative committee in charge of drafting economic laws has warned China's economy is growing too fast and inflationary pressure increasing. As Daniel Schearf reports from Beijing, the government has struggled to curb excessive investment to try to prevent its booming economy from going bust.

The Chinese parliament's Financial and Economic Affairs Committee has concluded the world's fourth-largest economy is overheating.

The official Xinhua news agency reported the panel reached that conclusion after it held meetings with government ministries in charge of the economy and China's central bank.

The central bank has increased the amount of cash banks must hold in reserve and raised interest rates to curb excessive lending, but has failed to significantly slow investment.

Tim Condon is the chief economist for Asia at ING Financial Markets in Singapore. He says Chinese officials have indicated interest and reserve rates are likely to increase again soon, perhaps as early as Friday.

"The problem of excess liquidity is a constant problem in China," he noted. "And, we'll see the application of more of the same measures in the future. The reserve requirements are going to continue to rise and we will see continued interest rate hikes to try and make sure that the abundant liquidity does not fuel a lending boom."

The Chinese government is concerned that over-investment in fixed assets, such as housing, and speculative investment in China's still developing stock market could create unstable markets.

The statistics bureau is expected Thursday to report the economy grew at about 11 percent and consumer prices increased above the government's goal of three percent in the first half of this year, raising concerns about inflation.

Stephen Green is a senior economist in Shanghai with Standard Chartered Bank. He says inflation has been mainly limited to food prices, so it is not a big concern. But, he says, to keep it under control, Beijing needs to allow the currency, the yuan, to appreciate faster, and to eliminate tax rebates for all exporters.

"You do not do all this stuff fast enough and you are going to still suffer from all this liquidity and possibly inflation," he noted. "But, if you move faster, and more radically, [to] appreciate the exchange rate, remove these taxes more quickly, then they could face slower growth. So, they are trying to walk this very, very fine line at the moment."

Green says he expects China to allow the yuan to appreciate four percent to five percent against the dollar in the next 12 months. But he says the government could let it rise eight percent to 10 percent without hurting economic growth.

He says removing tax incentives for exporters would also help reduce China's massive trade surplus, which causes friction with trading partners such as the Untied States and European Union.

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