MercoPress. South Atlantic News Agency

China's booming economy running out of spare capacity

China should let its currency rise faster to help it counter overheating in its booming economy, the Organization for Economic Cooperation and Development suggested in a report this week.

OECD's latest Economic Outlook raised its forecast for China's economic growth this year to 11.4%, up from the earlier estimate of 10.4%. The economy grew 11.5% in the third quarter from the same period a year ago. ''China's spare capacity has been used up and the economy is starting to overheat'' the report said, adding that "the balance of risks suggests that some tightening of macroeconomic policies is needed to reduce overheating, help ease inflation and calm equity markets''. In Beijing Chinese leaders have announced that a "tight" monetary policy is a top priority for 2008 following their annual economic planning meeting earlier this week. The chief aims are to prevent the economy from further overheating and to curb potentially destabilizing inflation, which hit 6.5% in October, tying the highest rate in a decade and mostly pushed by food prices. Among other things, authorities plan to more strictly control bank loans. They have repeatedly raised interest rates, boosted bank reserve requirements and taken other measures to discourage investment in property projects and factories out of fears a glut of unneeded projects could spur defaults on bank loans that would trigger a financial crisis. The report by the Paris-based OECD, an international non-governmental organization that collects and studies economic statistics and social data, said China's controls on its currency were hampering efforts to slow growth and ease inflation. The US dollar closed at 7.4095 Yuan this week on the over-the-counter market in Shanghai. The Chinese currency has gained 8.6% against the US dollar since a revaluation in 2005 that set its value at 8.11 Yuan per dollar. But the Yuan's modest gains against the US dollar have been undercut by inflation. The appreciation has been insufficient to prevent a depreciation of half a percent in the effective exchange rate, the report said. US critics of China's foreign exchange policies contend that the Yuan is undervalued by as much as 40%, giving Chinese exporters an artificial advantage in overseas markets. The topic is bound to be on the agenda of China-US trade and economic talks next week in Beijing. Beijing has pledged to loosen controls that keep the Yuan trading in a narrow range, but warns the country's developing markets and financial institutions require a stable currency. Meanwhile, the Yuan has weakened against the Euro, prompting complaints from EU trading partners about China's growing trade surpluses with that region. While the report did not directly criticize China's foreign exchange controls, it noted that efforts to tighten money supply to counter inflation were not having much impact. If this situation persists and global food prices do not moderate as expected, there is a risk of inflation becoming entrenched, as in the mid-1990s, the report said. Then, inflation peaked at 22% in 1994, prompting a broad economic retrenchment. Among other things, the report suggested that China should further reduce its reliance on exports as an engine for economic growth. There is also scope to redirect public spending to meet pressing social needs, such as education and public health, it said. The recommendations echo those of many government and private economists who say that China needs to continue to boost household incomes. By reducing the need of families to save to pay for schooling and medical care, they say, the government would nurture the strong domestic demand required to underpin solid, long-term growth.