BBCChina has raised interest rates for the second time this year, as it continues efforts to cool its booming economy. The central bank increased the main lending rate by 0.27% to 6.12%, in an effort to slow down a surge in construction and credit.

With the Chinese economy growing at 11.3% in the second quarter, Beijing is worried about a big rise in inflation.

The People’s Bank of China also increased the main deposit interest rate by 0.27% to 2.52%.

“It’s necessary to use interest rates as a lever to curb investment and demand for credit while mopping up liquidity,” said the central bank. The last increase in the lending rate, also by 0.27%, was in April.

BBCChina, which is the world’s second largest consumer of oil, saw oil production in July increase by 1.9% from a year earlier. Meanwhile, steel product output was up 22.5% and iron ore production rose 33.7%. The Asian giant is already the world’s biggest consumer of steel, copper, aluminium, cement, iron ore and zinc.

In a separate report on Tuesday, the World Bank raised its forecast for China’s economic growth for 2006. The bank sees China’s economy growing by 10.4% this year, an increase from its previous estimate of 9.5%.

On Monday, China posted figures showing that year-on-year retail sales were 13.7% higher in July, thanks largely to higher incomes, the National Bureau of Statistics said.

Bloomberg Growth is hurtling along at the fastest pace in a decade, defying official efforts to curb investment in unneeded factories and real-estate projects. The government’s immediate concerns are that overheated growth will saddle China with excess capacity, create more asset bubbles, and increase friction with the U.S. and other trading partners.

”China’s unbalanced growth model has now gone to excess and seems in danger of veering out of control,” says Stephen Roach, chief global economist at Morgan Stanley in New York. ”The longer China’s economic boom runs, the tougher it will be to avoid a more treacherous endgame.”

That might include defaults on bank loans, and eventually deflation and a collapse of asset values. Such a hard landing would risk breeding social unrest within China while drying up export markets for neighbors such as South Korea and Taiwan.

Risks of a bust are increasing, says Robert Subbaraman, senior economist for Asia at Lehman Brothers Holdings Inc. in Hong Kong. “We have raised our likelihood on the Chinese economy slowing sharply to a one-in-three chance,” he said in a July 28 interview. [snip]

Outstanding yuan-denominated loans on June 30 stood at 21.5 trillion yuan ($2.7 trillion), 15.2 percent higher than a year earlier. New yuan lending in the first half totaled 2.18 trillion yuan, approaching the central bank’s full-year target of 2.5 trillion yuan.

China’s banks carry more than 1.3 trillion yuan ($163 billion) of non-performing loans, exceeding 8 percent of those on their books, according to Moody’s Investors Services. Moody’s rates the financial strength of Chinese banks E+, on par with Pakistan’s and Ukraine’s. [snip]

For China’s leaders, one of the biggest risks from an abrupt slowdown is the threat of unrest among laid-off urban workers and millions of farmers who are flooding cities in search of jobs.

Neighbors and trading partners are also vulnerable. Exports account for 40 percent of South Korea’s economy, Asia’s third- largest, and China is that nation’s largest market.

“Korea will be one of the hardest hit if China slows,” says Oh Suktae, an economist at Citibank Korea Inc. in Seoul. “It’s a big risk for not just Korea, but Asia-wide and for the rest of the world.”

About 40 percent of Taiwan’s exports go to China; Australia is similarly dependent on Chinese markets. “Taking out Australia’s second- or third-biggest buyer would cut overall export prices and volumes,” says Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “It’s our biggest source of growth.”

Straszheim observes that “we used to say if America sneezes, Europe catches a cold; China is now in that situation.” ”There is a day of reckoning coming at some point,” he says.

The danger signs are increasing, though I cannot be certain that we are at the brink. The Chinese Ponzi scheme they call an economy has reached a point where everyone is borrowing and building, because to stop means that they have to generate revenues. And, despite gains, actual money coming in from the internal Chinese economy has not reached the point where it can sustain itself in any manner. Far too many Chinese are still stuck in the Third World.

The Chinese economy will become much more sensitive to fluctuations in externals because sustaining the scheme requires the external to continue to grow. Any extended dip in imports from China or exports to China may create a problem. The Ponzi scheme is balanced on a triad of economic conditions, any one of which failing may tip the scheme over the edge into collapse.

China is driving up commodity prices. By increasing demand, it is increasing its price for raw materials. It cannot pass that increase through to its consumers so the state is subsidizing those prices. Any interruption in commodity supplies or sharp increase in prices will be the tipping point for this leg of the triad.

China is obtaining its foreign currency through trade surpluses, primarily with the United States. Those surpluses have to grow to continue to generate the cash China needs to fund its purchases. At least twice this year the surplus has dropped. An extended period where the trade surplus drops, three months or more, and China runs out of the ability to fund purchases.

The third leg of the triad is the non-performing loans. I’ve discussed in the past how the Chinese have been hiding their loans off books with transfers to government entities created specifically to hold these loans. The 8% quoted about is the tip of the iceberg. The Chinese have moved far more than that amount off book. Indeed, that is the main reason for their growth rate. If you only count the profitable side of the books, you get a much higher growth rate than if you count the entire economy.

There continue to be reports of scattered unrest. These should not be taken as anything other than better reporting on the situation in China. When the reports vanish is when your index of suspicion should increase. If all of a sudden, everybody is happy in China, it will be a very bad sign.

I began predicting the collapse of China over two years ago. The progress towards that collapse has continued without pause.

Here is all my news and commentary on the topic.

Thanks to John with H&I Fires