Second quarter increase is the best in over 20 years, driven by foreign investments and real estate market. Experts wonder though whether it can be sustained. They are concerned about inflationary pressures and recommend greater focus on investing in rural areas.

Beijing (AsiaNews/Agencies) – China's economy accelerated in the second quarter of this year, growing by 11.3 per cent on the back of a burgeoning real estate market and rapid expansion in investment, up from 10.3 per cent in the first quarter, and second best performance since 1985.

The key driver is fixed investment, which rose by 31.3 per cent compared to the second quarter of last year.

For Zheng Jingping, an official at the National Bureau of Statistics (NBS), China was experiencing "problems" with "excessive investment and liquidity," and with the accumulation of too much foreign exchange reserves. But "the central government is clear about the problems of the economy and they have adopted effective measures to deal with them," he said.

Warnings from the World Bank have pointed out that overproduction could cut prices, and profits, worsening the balance sheets of banks with too many clients unable to pay their debts.

Masahiro Kawai, head of the Asian Development Bank's office of regional economic integration, said Beijing should prevent further "overheating" of its economy through higher interest rates, increased reserve requirements and further appreciation of the yuan.

The ADB expressed concern over China's bulging foreign exchange reserves, which could reach the US$ 1,000 billion mark by the end of this year.

"Experience shows that a sterilising policy [using central bank bonds to mop up excess liquidity] cannot be sustained for a long time," Mr Kawai said.

But for Mr Zheng China is not likely to revalue the yuan anytime soon, whilst others point out that China said the same last year only to raise the value of its currency on July 21.

What is more, many analysts remain skeptical about the reliability of NBS's data. They point out that they were released after the government approved the new five-year plan in early 2006, which gives local authorities a greater leeway in investing in the local economy despite their reputation for reporting inaccurate statistics.

Cuurently, the fastest rates of growth in investment spending are being recorded in inland provinces, such as Henan and Inner Mongolia.

"Less mentioned but equally significant", according to Dong Tao, an economist with Credit Suisse in Hong Kong, was net trade, "which exploded to US billion in the second quarter and contributed two points to GDP growth."

For the ADB's Kawai, Beijing ought to rein in the "ineffective" investment boom, whilst "boosting consumer demand in rural areas through social security reforms." (PB)

• china
• economy
• overheating
• gdp
• growth