Bloomberg.com: Emerging Markets

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By Rob Delaney

Jan. 26 (Bloomberg) -- China will tighten restrictions on factory emissions to reduce pollution and help prevent the economy from overheating, central bank Deputy Governor Wu Xiaoling said.

``We're going to put forth more effort this year in meeting energy consumption controls,'' Wu said yesterday in an interview in Davos, Switzerland, where she is attending the annual meeting of the World Economic Forum.

Stricter enforcement of the goal of a 4 percent annual increase in energy efficiency may help curb industrial expansion after two interest-rate increases failed to halt an investment boom last year. China's economy grew 10.7 percent in 2006, spurring speculation that the government will take further steps to rein in spending.

An environmental crackdown ``would only slow growth marginally,'' said David Cohen, an economist at Action Economics in Singapore. Cohen said he expects China to raise interest rates twice this year and further boost the amount of deposits banks must set aside as reserves to cool growth.

Target Missed

China last year failed to meet the target, set by Premier Wen Jiabao as part of a plan to improve the efficiency of energy consumption by 20 percent by 2010. Investment in factories, roads and other fixed assets climbed 24.5 percent in 2006, the government said yesterday. Growth in 2005 was 27.2 percent.

The government will spend more money this year on research into clean-energy technologies such as gasification of coal, Hua Jianmin, a member of China's State Council, the country's highest governing body, said in his keynote address at Davos.

The People's Bank of China will raise its benchmark lending rate in the first half, 11 of 14 economists surveyed by Bloomberg News forecast. Data released yesterday showed inflation accelerated to 2.8 percent in December, the fastest in almost two years.

Raising interest rates alone may not be enough to stem price increases, Wu said. ``Whether or not we raise rates, we could see inflation,'' she said. The government will enforce more strictly this year measures aimed at reducing energy consumption, Wu said.

Inflation is currently ``not high,'' Wu said today in a Davos panel.

Environmental Costs

Wu's comments reflect the government's concern at the environmental cost of four years of economic growth of 10 percent or more that has made China the world's fourth-largest economy and the largest energy user after the U.S.

An estimated 70 percent of rivers in the world's most populous nation are polluted by toxins. As many as 300 million of the country's 1.3 billion people have no access to clean drinking water, according to government estimates.

Every $1 of China's overseas sales requires four times the energy used by the U.S, seven times that of Germany and ten times that of Japan, Vice Commerce Minister Gao Hucheng said last week, citing Chinese research.

``The government wants to put more teeth into environmental protection,'' Sijin Cheng, a New York-based analyst at Eurasia Group, a political consulting company, said in a telephone interview today. ``They can't afford to apply it so religiously yet across the whole economy, so vigorously that it will bring down entirely economic growth. They want to target specific sectors, specific companies.''

Crackdown on Polluting

The government has stepped up a crackdown on polluting factories and power plants this year, forcing closures and refusing to approve projects by companies that violated rules.

Datang International Power Generation Co., the largest electricity supplier in northern China, said it will shut five plants to comply with an order by the environmental regulator. Baotou Iron & Steel Group Co., China Huadian Corp. and China Guodian Group were among other companies penalized.

The government found 82 projects in 22 provinces with a total investment of 112.3 billion yuan ($14.4 billion) that failed to comply with rules, the Beijing-based State Environmental Protection Administration said this month.

PetroChina Co., the nation's biggest oil company, was fined 1 million yuan for a toxic chemical spill at its Jilin Petrochemical Co. plant that polluted the Songhua River and resulted in water supplies being cut to more than 3 million people in northeastern China, the state-run China Daily reported today.

Easing Controls

``Arduous tasks still remain in energy saving, reduction of material inputs and reduction of pollutant emissions,'' Xie Fuzhan, head of the National Bureau of Statistics, said at a briefing yesterday in Beijing on economic growth figures.

The government also plans to ease controls on oil and gas products to encourage conservation and deter waste. Speaking in a Sept. 16 seminar at meetings of the Group of Seven nations and International Monetary Fund in Singapore, Central Bank Governor Zhou Xiaochuan called for the government to end fuel subsidies, arguing that they distort the economy in favor of inefficient manufacturers.

``Energy prices are really low in China now which leads to a high demand,'' Stephen Green, senior economist at Standard Chartered Bank Plc. in Shanghai said by telephone today. ``It has been said that the government will introduce fuel taxes, or lift energy prices, however it's hard to see that will happen soon.''

`Too Ambitious'

China's target of a 20 percent reduction in energy use per unit of GDP by 2010 is ``too ambitious,'' International Energy Agency analyst Brian Ricketts said in Shanghai last month.

Environmental measures may be an additional tool for tackling investment fueled by a record $177.5 billion trade surplus that has aggravated tensions with the U.S. and Europe. China's exports jumped 27 percent last year, prompting calls for the government to let the yuan gain more rapidly. U.S. lawmakers accuse China of holding down the currency's value to make its exports more competitive.

Wu said today the government aimed to reduce the trade and capital-account surpluses.

The yuan has gained about 4.2 percent against the dollar since China revalued the currency by 2.1 percent and ended a decade-old peg in July 2005. Chinese officials have pledged to make the yuan more flexible, without giving a timetable.

To contact the reporter on this story: Rob Delaney at robdelaney@bloomberg.net .