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Updated: 2007-06-15 16:52

China's factory and property investment surged, adding to speculation that an interest-rate increase is imminent after inflation, exports and industrial production growth accelerated.

Fixed-asset investment in urban areas rose 25.9 percent in the first five months from a year earlier to 3.2 trillion yuan (US$420 billion), the National Bureau of Statistics said today.

That topped the 25.5 percent increase in the first four months and the 25.4 percent median estimate of 17 economists surveyed by Bloomberg News.

Inflation is at a 27-month high and the key stock market index has doubled this year amid concern that gains have been too fast and a bust is looming. Premier Wen Jiabao this week said "moderate tightening" is needed to prevent the world's fastest-growing major economy from overheating.

"Economic activities are very strong," said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. "The government will need to take some action and do more monetary tightening."

Inflation accelerated to 3.4 percent in May, the highest level since February 2005. Industrial production jumped 18.1 percent. Exports surged 28.7 percent and the trade surplus swelled 73 percent to US$22.5 billion, pumping the financial system full of cash.

The CSI 300 Index of stocks has rebounded by 16 percent since a June 4 plunge.

China has raised borrowing costs and deposit rates twice this year and ordered lenders to set aside more reserves five times. Increases on May 18 pushed the benchmark one-year lending rate to 6.57 percent and the deposit rate to 3.06 percent.

More tightening may come within "days," Wang Qing, chief China economist at Morgan Stanley in Hong Kong, said yesterday.

The economy expanded 11.1 percent in the first quarter and last year's 10.7 percent growth was the fastest since 1995.

China's economic problems include "rapid growth in industrial production and the trade surplus, fast investment growth, excessive liquidity, increasing inflationary pressure and energy conservation challenges," Wen said June 13. He highlighted the risk of a rebound in fixed-asset investment.

The central bank will probably increase interest rates at least once more in 2007 and banks' required reserve ratios at least twice more, a Bloomberg News survey showed.

Wen is trying to curb excess spending on factories and real estate to prevent raw-material inflation, excess capacity and oversupply leading to falling prices and profits.

Besides monetary policy, China has tightened project approvals, curbed land use, increased energy costs, and cut export rebates to slow investment. State companies will be required to pay dividends under a trial program this year, leaving less money for expansion.

"Investment in China is a problem that also needs structural solutions," said Ha Jiming, chief economist at China International Capital Corp in Hong Kong. "Some industries are using up too much energy and causing too much damage to the environment and the government needs to control them."

China last month started a campaign to cool excess growth in industries including iron, steel, copper, aluminum, zinc and cement that pollute and consume energy heavily.

Soaring bank lending and the buoyant stock market help to fuel industrial expansion. Banks extended 2.09 trillion yuan of new loans in the first five months, compared with 3.18 trillion yuan for the whole of 2006.

Western Mining Co, a zinc, nickel and copper producer based in Qinghai Province, last week said it will sell shares in an initial public offering in Shanghai to fund a 4.44 billion yuan expansion.

The Organization for Economic Co-operation and Development on May 24 raised its estimate for China's growth this year to 10.4 percent from 10.3 percent, saying domestic demand will pick up and a rebound in investment is possible.