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A lot of steel to build steel plants

Fixed-asset investment in China is growing faster than demand, creating overcapacity that may never be drained no matter how fast exports grow. A new burden of potential non-performing loans could be accreting as a result.

FOR INVESTORS FOLLOWING the China story, Sars is now a fading memory. Their fears that the People's Republic's economy would be knocked sideways by the virus have proved unfounded. GDP growth this year is back on track and will break through the 8% barrier again. Other figures for the year to July are equally impressive. Exports are up 34%, investment in fixed assets jumped 32%, foreign investment has risen 34%, and both bank loans and money supply have risen by 20%.

It would seem that after briefly slowing in the spring, China's economy is now once again at full tilt.

But such impressive numbers are themselves causing concern. Instead of doctors whipping out their thermometers every few minutes, it's now economists who are checking for signs of overheating. Some believe that in certain sectors China could be a bubble waiting to pop. Eddie Wong, ABN Amro's chief strategist for Asia, is in this camp. "This is an over-investment bubble. And I think it's a fairly serious one," he says

Others are uneasy in a vaguer way. They are sure there is trouble ahead, but not too sure exactly where. Dong Tao, CSFB's chief economist for Asia, says: "This is not a normal overheating so there's a big debate about whether the economy is overheating or not.

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