tipping.gifChina's consumer boom shows no sign of slowing. Retail sales in August jumped 17% year-over-year to almost 712bn yuan, compared to a 16% rise in July.

While soaring prices contributed to the rise — inflation is current running at 6.5%, the most in the decade — the “feel good” factor also had a lot to play. Consumers have benefited from sizable stock market gains and a 14% first-half increase in disposable income among urban households.

Beijing has also lifted minimum wages, expanded welfare coverage and lowered a tax on interest from savings accounts.

The World Bank expects headline inflation to fall, but it estimates China's GDP growth rate has recently outstripped the potential growth rate. The result is that demand is running ahead supply and may soon generate inflationary pressures that are more difficult to eliminate.

The solution, according to the World Bank, is to reduce China's embarrassing trade imbalance, by encouraging more imports or reducing exports. In its China Quarterly Update, the bank warns:

The growing trade surplus is not only causing trade tensions internationally; domestically it is the key driver for the large balance of payment surpluses that buoy liquidity, keep monetary conditions loose, and contribute to asset price pressures.”

The bank says China should move to reduce the trade balance now, because Chinese people who might lose from a higher exchange rate are at present cushioned by strong wages, profits and agricultural prices.

Meanwhile, foreign investment in China rose almost 13% to $42bn in the first eight months of this year, despite new limits on investment in real estate and acquisitions of Chinese companies..

Foreign investment in August was $5bn, up almost 12% from the same month last year, the Commerce Ministry said.

Beijing surprised investors last year by imposing limits on foreign investment in real estate and tighter restrictions on foreign purchases of Chinese companies.

The government says it is trying to cool an overheated economy and protect national security. But foreign business groups complain some restrictions appear to be an attempt to shield Chinese companies from competition in violation of Beijing's promise to open its markets. More in this AP story.

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