(China Daily)
Updated: 2007-07-20 11:15

The faster-than-expected acceleration in economic growth in the first half of the year makes it urgent for China to further tighten its macro controls.

The economy surged by 11.9 percent in the second quarter, following 11.1 percent growth in the first quarter.

Looking over the latest batch of economic figures, one finds reasons for optimism.

For instance, retail sales expanded at a rate of 15.8 percent in the second quarter, after soaring 14.9 percent in the first quarter. Domestic sales grew by 16.0 percent in June compared with the previous month.

Admittedly, consumption remains low as a share of gross domestic product. But the steady acceleration in domestic consumption, if it is sustained, will help the country rebalance its growth away from investment and exports.

The fast growth of income is also good news for the country.

The average income of urban residents increased by 14.2 percent year-on-year in the first six months, while farmers earned 13.3 percent more than they did during the same period last year.

This kind of income growth will raise people's living standards and fuel consumption.

The latest statistics also revealed some problems that policymakers should be quick to fix.

The fact that investment has continued to expand at a rapid pace means that more tightening measures are needed - not only to prevent the economy from overheating but also to help the country achieve its energy-saving and pollution-reduction goals.

Fixed asset investment soared 25.9 percent in the first half of this year. Though the number was 3.9 percentage points lower than the same period last year, it marked a 2.2-percentage-point pickup from the first quarter.

If the pace of investment cannot be effectively reined in, it is likely that the country will eventually find itself caught between overcapacity and a failure to improve energy efficiency and cut pollution emissions.

Another worrisome problem is the threat of inflation. China's consumer price index (CPI) jumped 4.4 percent in June, pushing the inflation level for the first half of the year up to 3.2 percent, well above both the central bank's comfort zone of 3 percent and the benchmark deposit rate.

It is far too early to tell if the increase in the CPI, which was largely fueled by soaring food prices, is only temporary or will bleed into non-food categories.

However, since the economy is currently at greater risk of boiling over than cooling down, policymakers should look at the inflation figure with great caution.