China's Premier: Growth "Too High"

China's Premier goes on record today in Beijing about unsustainable growth in the country:

March 16 (Bloomberg) -- China's economic expansion, the source of about a 10th of global growth last year, is unstable and environmentally unsustainable, Premier Wen Jiabao said.       

``China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced,'' Wen said at a press conference in Beijing today. Energy efficiency and environmental protection issues haven't been ``properly resolved,'' he said.                

Wen's comments underscore government concern that too many factories are being built in China, worsening pollution and leaving the world's fastest-growing major economy vulnerable to a slowdown in demand. A record $177.5 billion trade surplus has flooded the economy with cash, making it harder for the government to cool investment by reining in bank lending.      

``China has maintained relatively steady and fast growth over the past few years, but this is not a time for complacency,'' Wen told reporters at the National People's Congress meeting. ``The biggest problem in China's economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable.'

This is very big news, and effectively amounts to an admittance that the next growth revisions we will probably see for the country will be around 8 - 9%. While this is still strong, it will have wide-ranging impacts for demand in commodities in particular, to growth in the south east Asian region.

The reaction by Chinese markets however seems small: just a dip of 0.72% in the Shanghai  Composite Index to 2930.48, barely a blink from the Hang Seng, down 0.08% at 18,953.50, and even the heavily leveraged and volatile B-share index in China is off just 1.36% to finish the week at 170.21. There is almost certainly bigger declines headed for Monday/Tuesday, especially if the sub-prime fiasco in the U.S. continues to make waves across the world over revised import trends.

*UPDATE* 12.04 pm Further context at thestreet.com where I'm looking at this situation in more detail (Another Shot Across Asia's Bow):

In Hong Kong, investors were speculating over the potential effects of the debacle surrounding subprime mortgages in the U.S. and revisiting the importance of the yen carry trade -- the borrowing of yen to finance investment in higher-yielding assets elsewhere. The broadest consensus is that the subprime mortgage deterioration, despite constituting less than 10% of America's mortgages, will prompt banks to tighten credit standards. That could undermine U.S. consumer spending and prove a drag on Asian exports.

Chisato Haganuma, a senior Japan strategist for Nomura Bank in Hong Kong, says Asian exports -- a crucial source of income to the region -- will "soften considerably" and that the second-quarter outlook for the region is "gloomy".

Just as appetites for risk were starting to normalize again, fears that the U.S. subprime dilemma may have a further destabilizing impact on exports are prompting renewed concerns about an unwinding of the carry trade.