Pace of Chinese investment quickens, rate rise seen

By Langi Chiang and Jason Subler

BEIJING (Reuters) - Chinese capital spending in October rose at the briskest pace in over a year, rounding out a strong batch of monthly economic data and cementing expectations of a fresh rise in interest rates, possibly as early as Friday.

Capital spending in urban areas on fixed assets such as factories and power plants increased 26.9 percent between January and October compared with the same period last year, the National Bureau of Statistics said.

It was the fastest year-to-date pace since September 2006, eclipsing forecasts of a 26.3 percent rise and the 26.4 percent increase in the first nine months.

Economists calculated that investment spending in October alone was up 30.7 percent from a year earlier. JPMorgan Chase said that was the quickest monthly clip since June 2006.

"That makes an interest rate rise more likely today. Everybody in the market is now expecting it," Qiu Gaoqing, an analyst with Bank of Communications in Shanghai, said.

Shanghai stocks and the yuan eased on Friday as investors focused on the potential for higher interest rates.

The People's Bank of China (PBOC), the central bank, has already raised interest rates five times so far this year and ordered banks on nine occasions to hold more of their deposits in reserve instead of lending them out.

Mingchun Sun, an economist with Lehman Brothers in Hong Kong, agreed that a rate rise was on the cards.

"We expect one 27 basis-point hike by the end of this year, and it's possible that it could even happen today or tomorrow," he said.

China shifts its interest rates in increments such as 0.27 that are divisible by nine to make it easier for banks, which levy interest based on a 360-day year, to calculate the new payment changes.

A HOT ECONOMY

Chinese policy makers have been trying to cool over-investment for fear that excess supply will drive down profit margins and leave companies unable to service their debts.

"I'm pretty worried about this strong number because we think that the overcapacity issue is already a big problem, and this number is definitely making this more severe," Sun said.

The government has tightened land-conversion and environmental-protection rules, taking particular aim at industries that consume a lot of energy and spew out pollution.

Slightly softer factory output and export growth in October had prompted some economists to conclude that these measures might be biting. The investment report suggested they are not.