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State Puts Lid on Overheating Industries

In spite of repeated warnings, China's government-backed investment momentum has seen no signs of cooling down: rather, it seems to be heating up.

The National Development and Reform Commission once again warned Monday that the country's economy is likely to suffer from over-investment, saying China's fixed investment during the January-February period soared by 53 percent on a year-on-year basis.

The rate, which compares to 26.7 percent recorded last year, is the highest since 1994.

The country started 7,816 projects nationwide during those two months. During same period last year, only 4,800 projects began construction.

In an unusually outspoken statement obtained by China Daily, the most powerful cabinet department in charge of economic development said the heated investment is likely to create ongoing shortages in the power supply, spur price hikes in resources and refuel mounting inflationary pressures.

The Chinese economy grew a robust 9.1 percent last year, with fixed investments seen as a bigger driver than the other two growth engines, consumption and exports.

But there was excessive investment in areas like steel, cement and aluminum, as well as the real estate and auto sectors, as banks lent aggressively to tap the growth momentum.

Excessive growth in those sectors is straining transportation and power suppliers, while driving up prices of raw materials and damaging industries across the country.

China's economy is facing a turning point and the priority should be to take every possible measure to realize stable economic growth, the commission said.

Earlier this month, the commission promulgated administrative and financial solutions to stop soaring investment in production.

It said it will generally stop approving new construction projects by steel company groups as well as steel and iron mills. The commission is also working with the banking sector to tighten credit requirements for steel and other projects.

But economists said rapid investment growth will continue if the role of government, especially that of local government, doesn't change.

"China's economy is still driven by government and investment, instead of consumption. Governments at various levels are active in investment," said Lin Yueqin, researcher with the Economic Research Institute under Chinese Academy of Social Sciences.

Compared with same period last year, investment by the central government is up by 12 percent but investment by the local governments rose by 64.9 percent during January-February.

"Economic development is not everything for the government, and we should pour more energy on other indicators such as education, health, environment and social welfare," said Lin.

The central government has decided to slow the pace of gross domestic product (GDP) growth to 7 percent this year and aims to cultivate a "scientific approach" to social development. But many officials believe the higher the local economic indices reported, the more likely they will be promoted, Lin said.

(China Daily March 23, 2004)

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