Fixed-asset investment in urban areas rose 29.8 percent in the quarter from a year earlier, the statistics bureau said today. That exceeded the government's 18 percent target for 2006. The bureau's figure for economic growth confirmed an April 16 announcement by President Hu Jintao.

"There are prominent problems that call for our attention, such as rapid growth of investment in fixed assets and of bank loans," Zheng Jingping, a bureau spokesman, said in a statement issued in Beijing.

Premier Wen Jiabao last week said he wants to curb spending on factories, which has caused oversupply of goods in China and pushed global commodities prices to records. The government is seeking to avoid a sudden slowdown in China, the world's biggest market for steel and second-largest oil user, by shifting its focus to raising incomes and consumer spending.

"Overinvestment has become a serious problem again and this kind of growth model is unsustainable," said Zuo Xiaolei, chief economist at Galaxy Securities, China's biggest brokerage. "The central bank has to pull liquidity out of the system and break this cycle or we could see a much sharper slowdown in growth than the government wants."

Land Sales Controls

In March alone, fixed-asset investment jumped 32.7 percent. China will tighten controls over land sales for new investment projects, Zheng said at a press conference in Beijing. The yield on China's three-year government bond is near a four-month high as investors anticipate more tightening by the central bank.

President Hu last week said fast expansion isn't a goal in itself for the government, and expressed concern about the economic structure. The government cracked down on lending to investment in projects such as steel mills and auto plants two years ago, only to see growth begin to inch up again in 2005.

China's top economic planning body, the National Development and Reform Commission, said in March it aims to slow investment growth to around 18 percent this year.

With disposable incomes climbing at about 10 percent a year and investment soaring, China is accounting for a bigger share of business at global companies such as Caterpillar Inc., Starbucks Corp. and Nokia Oyj. Commodities markets fell in the second quarter of 2004, the last time China moved to curtail investment.

Raise Reserve Requirement?

"If we don't start to see some slowdown in investment growth I'll be concerned," said Romeo Dator, co-manager of the China Region Opportunity Fund run by U.S. Global Investors Inc. "The question is what policies will the government take and how draconian will they be."

Zuo and economists including Jonathan Anderson at UBS AG say the People's Bank of China may raise the percentage of deposits banks must set aside as reserves to stem money supply growth that's encouraging lending for investment projects.

New yuan lending totaled 1.26 trillion yuan in the first quarter, 70 percent more than the same period last year, the central bank said last week. The expansion accounts for half of the bank's 2.5 trillion yuan loan growth target for this year. Money supply growth has topped the central bank's official target for 10 straight months.

Surging credit growth, a widening trade surplus and double-digit economic expansion amount to "close to a perfect storm of problematic trends" for the central bank, Anderson, chief Asia economist for UBS AG, said in a research note. That "should guarantee some sort of policy response over the next few weeks."

Topping France, U.K.

In addition to increasing the reserve requirement ratio for banks, the People's Bank of China may also impose more administrative controls on lending, and adjust lending or deposit interest rates "at the margin," Anderson wrote.

Gross domestic product rose to 4.33 trillion yuan ($540 billion) in the first quarter, the statistics bureau said. Growth accelerated from 9.9 percent in the fourth quarter, and equaled the pace of expansion in the last quarter of 2004, Zheng said.

China leapfrogged France and the U.K. to become the world's fourth-largest economy last year, boosted by the results of a nationwide census in 2004 that showed the $2.26 trillion economy was 17 percent bigger than previously estimated.

Accelerating growth in China has pushed raw material prices to records, benefiting companies such as Jiangxi Copper Co. the nation's second-biggest producer of the metal. The price of copper yesterday reached its highest ever in London.

Currency Reform

The Hang Seng China Enterprise Index, which comprises mainland companies incorporated in Hong Kong, has risen 34 percent this year, the seventh-best performer among 77 world indices tracked by Bloomberg. The gain has been led by metals companies such as Jiangxi Copper and Zijin Mining Group Co.

The International Monetary Fund yesterday raised its forecast for China's expansion this year to 9.5 percent from an earlier 8.2 percent, citing soaring exports and investment. Still, it cautioned that the composition of growth raises risks for the economy over time.

"What leads to higher growth in the short run could lead to difficulties in the medium term," said David Burton, director of IMF's Asia and Pacific Department. "It could mean too much investment in wrong places, excess capacity in certain sectors, nonperforming loans for the banking system."

Allowing the currency to appreciate faster would also help the central bank stem lending growth, economists said. The yuan has risen 1.2 percent against to dollar since July, when China revalued it and started managing it with reference to a basket of currencies.

The World Trade Organization, in its first review of China's commercial policy, yesterday urged China to ease currency controls to improve economic efficiency. The central bank buys foreign currencies to control the pace of yuan appreciation, and China restricts the flow of capital going overseas.

Lifting currency controls would "allow the market to play a greater role in determining interest rates and therefore in allocating resources," the WTO said in the report.