(Adds reaction, details)
By Jason Subler and Aileen Wang
BEIJING, March 11 (Reuters) - China's capital spending accelerated in the first two months of the year as the government's 4 trillion yuan ($585 billion) stimulus package kicked in, providing further tentative evidence of recovery in the world's third-largest economy.
Investment in urban areas in fixed assets such as roads, power plants and apartment buildings rose 26.5 percent in January and February from a year earlier, easily beating market forecasts of a 21.5 percent increase. [ID:nPEK189265].
"The figure shows the economy is doing very well and Beijing's stimulus package is working," said Jiang Chao, an analyst at Guotai Junan Securities in Shanghai.
In all of 2008, urban fixed-asset investment was up 26.1 percent; in the first two months of 2008, it rose 24.3 percent.
The National Bureau of Statistics did not issue a figure for February alone. The combined number is meant to smooth out distortions caused by the timing of the Lunar New Year, which fell in January this year but in February last year.
Yu Song and Helen Qiao at Goldman Sachs said the rebound in fixed asset investment was occurring more quickly than they had expected.
"So today's FAI data have increased upside risks to our domestic demand forecast," they said in a note to clients.
A breakdown of the data pointed to the initial impact of the stimulus plan unveiled in November, even though the government so far has allocated only 230 billion yuan of the funds.
Spending on projects backed by the central government rose 40.3 percent from a year earlier, while investment in transport, including railways, rose a whopping 210.1 percent.
China's rush to expand its overcrowded rail network exacted a price on Wednesday. A construction site along a high-speed line linking Beijing and Shanghai collapsed, burying at least seven workers, state media reported. [ID:nPEK372492]
MIXED SIGNALS
"There's no doubt that fixed-asset investment will be on an upward trend in the first half of this year, given the capital being injected into infrastructure and public housing," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.
But Lu said he was worried that the momentum would flag as the year wears on if private capital spending fails to pick up.
Investment in real estate was just 1.0 percent higher than in the first two months of last year, compared with a 20.9 percent increase in all of 2008.
China's property market is glutted and developers have struggled to obtain financing, slowing housing starts.
"The sharp drop in real estate sector spending reflects sagging private sector investment, and we don't see a recovery until 2010," Lu said.
Some other figures recently suggest China is holding up better than other major economies in the face of the deepest global slump in more than 70 years.
Manufacturing is improving after a sharp decline, according to surveys; bank lending is surging; cement and steel output rose 17 percent and 2.4 percent, respectively, in the first two months, while the decline in power demand slowed; and car sales topped 800,000 in February for the first time in eight months.
But other statistics suggest China is not out of the woods yet. Exports and imports have been falling; inventories of raw materials such as coal have started to mount again; and a rise in prices of steel and other metals proved to be short-lived. (Additional reporting by Michael Wei; Writing by Alan Wheatley; Editing by Ken Wills)