In 2007, measures to cool the overheating economy are likely, writes Clifford Coonanin Beijing

In China the boom continues and next year won't be any different. The cranes are not as much in evidence on the Beijing skyline as 2006 draws to a close - there are fewer major building projects starting now because all work must be finished by the time the Olympics roll into town in August 2008. But there are more new Buicks, Audis, VWs and Toyotas crowding the streets than ever before, and the factories of southern China continue to churn out more than half of the world's finished goods.

China is physically a much richer place; you can see it in the skyscrapers, the new restaurants and the gleaming motorways of the coastal cities and Beijing.

Some of Ireland's biggest players, including CRH, Treasury Holdings and Glen Dimplex, are clearly in China for the long haul.

Just as the economy is simmering at seemingly unsustainable levels, it sometimes feels like the Chinese growth forecast industry is also in danger of overheating. Making forecasts about the economy has become a ritual of speculation about how many percentage points higher than 10 per cent the final gross domestic product (GDP) growth figure will be, as well as trying to second-guess the Beijing government as to what measures it will take to cool the overheating economy.

Once again, Beijing has pledged to target slower GDP growth in the world's fourth largest economy in 2007, following four years of double-digit expansion.

There is a definite political will to cool economic growth, which means that the politicians' take on things will often defy the economic realities.

A top-level meeting of policy makers this month fixed a growth target for 2007 of 8 per cent, wildly undershooting even the most cautious prognoses. The annual session of parliament in March also set a goal of 8 per cent growth for 2006.

"The central government set the target of around 8 per cent because it cannot set a very high target. If the target were 10, then the actual growth could be 12 percent," says Zheng Xinli, an economist for the ruling Communist Party's policy research office.

The out-turn for growth in 2006 is expected to be about 10.5 per cent, while the economy is expected to grow by about the same rate, or perhaps a shade less, in 2007.

Ma Kai, the minister in charge of China's top planning agency, the National Development and Reform Commission (NDRC), forecasts that GDP will exceed 20 trillion yuan (€1.95 trillion) this year, which would mark an increase of 10.5 per cent on 2005.

The way he sees it, speedy economic growth has been accompanied by stability in the form of "good efficiency and low inflation", which will "benefit the people and power future development".

However, he warned that the basis for economic development is not solid enough, plus GDP is growing too fast. In a statement echoing former US Federal Reserve chairman Alan Greenspan's comment a few years back, which warned against irrational exuberance, Ma told his Chinese compatriots: "It's necessary to keep clear-headed."

Economic growth will take on a strongly political aspect in 2007, as the government seeks to spread the new wealth among the populace.

While the cities of the eastern seaboard have done well from economic growth, the rural poor, those 800 million souls who earn less than €1 a day, are not benefiting quite as much.

This has potentially destabilising consequences for the Communist Party, leading to a number of programmes aimed at boosting farmers and those in the depressed Chinese heartland and western provinces.

"We should promote social justice and stability by letting the people share the achievements of reforms," says Ma.

Some of the cooling measures have been successful - a raft of monetary and administrative steps to dampen a liquidity-driven capital spending spree slowed annual fixed-asset investment growth to 26.8 per cent in the first 10 months from a peak of 31.3 per cent in the first half.

Chen Dongqi, a senior researcher with the NDRC, says growth dismissed concerns that weaker investment towards the end of the year could translate into a more marked slowdown than expected.

"There will be no big problems with the economy next year, and the fairly good growth will be maintained," says Chen, who expects this year's growth to turn out at more than 10.5 per cent.

Fixed-asset investment growth rate would be around the same level as 2005, when it expanded 25.7 per cent.

Unemployment is always potentially destabilising and the Beijing government is aware of the fact it needs to create 10 million new jobs each year for people joining the workforce in order to hold the urban jobless rate steady about 4.2 per cent.

The general picture is that while wasteful investment has led to over-capacities in some industries, supply and demand are fairly well balanced in most sectors.

The authorities are expected to fine-tune tax and financial policy further to slow the increase in China's trade surplus, which is expected to reach a record €130 billion this year, up from €78 billion in 2005.

The Organisation for Economic Co-operation and Development (OECD) forecasts GDP growth of 10.3 per cent in 2007, compared to 10.6 per cent this year, but the Paris-based think tank expects it to pick up again in 2008 to 10.7 per cent growth. This would mean six consecutive years of double-digit percentage growth.

The OECD believes China needs to be more accommodating on the yuan, allowing the currency to rise faster to counter the risk of overheating from double-digit growth, and to help slow the growth of its current account surplus.

Beijing is likely to keep trying to rebalance the economy, which would make economic growth less dependent on exports and investment, while introducing measures to boost consumption.

"From a macro-economic point of view, China is now arguably the world's strangest economy. Rapid growth, record investment ratios . . . but also falling profits and a sky-high trade surplus. In short, something looks more than a bit out of whack," says Jonathan Anderson, chief Asia economist at UBS.

UBS believes household consumption is not the main problem, as most excess savings in the country come from Chinese firms who "expropriate" market share and profits from the rest of the world.

"This imbalance is a temporary, not a structural, phenomenon and the economy is already in the process of self-adjusting," he says.

While China still needs longer-term structural reforms in consumer finance and the social safety net, these are not the solution to the current disparity, says Anderson.

"Rather than focusing on urban consumption as a key 'turnaround' theme, we strongly recommend that investors look instead at margin recovery in currently overheated heavy industrial sectors, and the rise of rural spending," says Anderson.

Some good old-fashioned politics will also come into play when the sums are added up for 2007. Next year is the second year of China's 11th five-year plan and local cadres will be looking for promotion in the run-up to October's five-yearly Communist Party congress.

No official will want anything untoward to happen in such a vital year.

Whatever happens at home, China will remain a buzzword on the regional equity markets, as renminbi policy shapes investment decisions throughout Asia. As has been the case for several years now, China's resilience is expected to help offset the effects in the region of any slowdown in the US.