By Jin Yan

In spite of the rapid growth of the Chinese economy and improving economic efficiency in 2003, we still have to watch out for the problem of over-investment in some sectors, where blind expansion and repetitive construction have caused new troubles for the economy.

In some industrial sectors, investment has been growing too fast, with production capacity exceeding market demand.

Last year, the investment growth in sectors of iron and steel, aluminum and concrete reached 72.2 percent, 56 percent and 133 percent, respectively, on a year-on-year basis, much higher than the 26.7 percent growth of the overall fixed asset investment during the year.

Moreover, such excessive growth was often accompanied by irrational product structure and low efficiency. For example, as much as 60 percent of the steel products were those with excessive supply and 97 percent of the steel enterprises were small enterprises with an annual output lower than 5 million tons.

The economy was also hindered by supply shortages in energy and raw materials, especially in sectors such as coal, power, petrol and oil, transportation and food.

For many of the strategic resources with big consumption demands, China is still largely reliant on international markets. Meanwhile, as various development zones have expanded, much farmland has been occupied for industrial use, which has seriously eroded the local ecological environment.

An investigation into the development zones in 24 provinces and municipalities found that these regions had more than 3,500 development zones under around 30 categories. These zones altogether occupied areas of up to 36,000 square kilometers, yet much of the land remained unused.

In some regions, so-called high-tech projects have flourished. In the Yangtze River Delta, there are 14 cities whose top four pillar industries during the 10th Five-Year Plan (2001-05) are the same electronic information, automobiles, new materials and bio-medical products.

The People's Bank of China therefore came up with a series of policies to tighten credit in 2003.

One of the measures is to give timely window guidance to commercial banks to urge the control of lending.

As lending has grown rapidly while consumer prices have remained low, the central bank ordered commercial banks to analyze the lending trend since the start of last year and asked them to control credit.

Since July, the central bank has organized three window guidance meetings to give risk warnings to the commercial banks.

Financial institutions were warned about preventing declining capital adequacy and various lending risks. They were also asked to improve internal control and liquidity.

While actively monitoring credit supply, the central bank has also urged commercial banks to upgrade their loan structures.

At the end of 2003, renminbi loans increased by 2.8 trillion yuan (US$338.1 billion) compared with the start of the year. But as the monetary policy gradually took effect, the growth of new loans had been slowing down quarter-by-quarter with the average monthly increase of new loans from 2,965 yuan (US$350) during the first half year to 2,300 yuan (US$270) in the third quarter and further down to 979 yuan (US$110) in the fourth quarter.

The abnormal loan growth was therefore basically under control.

Among the newly increased loans during 2003, 60 percent went to infrastructure construction, individual consumption, bill payments and agriculture.

The four sectors absorbed new loans of 637.3 billion yuan (US$77 billion), 509.1 billion yuan (US$61.5 billion), 340.3 billion yuan (US$41.1 billion) and 153.1 billion yuan (US$18.5 billion), respectively, last year, which added up to 1.64 trillion yuan (US$198 billion) overall.

Moreover, the lending structure was also adjusted: more loans were granted to small- and medium-sized enterprises with good market potential, efficiency and creditability.

Students and laid-off workers acquired more loans to continue education and find jobs.

Some rural credit cooperatives also got more support through central bank lending and specially-issued central bank bills.

On the other hand, in the real estate sector, where lending had expanded too rapidly in some regions since 2002, the central bank reined in credit management last year.

To ensure financial stability and prevent risks brought by fluctuations in the real estate market, it issued a circular on strengthening real estate loan management on June 5, which disclosed risks in lending in that sector and set up principles for the management of loans towards real estate developers and second home buyers.

Auto consumption loans are another sector that has gained increasing attention from the central bank.

To boost the healthy growth of auto loans and standardize management of such loans, the central bank has adjusted its policy towards auto consumption loans. Vehicle buyers, for example, are prohibited from acquiring consumption loans with no down payments. And commercial banks have made a blacklist of auto loan borrowers with poor credit.

Recently, the central bank and the China Banking Regulatory Commission have also jointly drafted a car loan management regulation, and are listening to opinions from the public on the regulation.

Furthermore, after thorough investigations into loan increases in sectors that have shown signs of overheating, the central bank has been trying to build a lending risk monitoring system to prevent problematic loans in advance.

It has ordered its local branches to look into funding sources and loan projects in the sectors of iron and steel, aluminium, concrete, real estate and automobiles.

Analyzing the triggers for loan growth, the central bank has been designing measures to curb and prevent lending risks in these sectors. And a relative risk warning system is being established.

Of course, the fundamental aspect of better credit risk management is a sounder credit system that records the correct credit status of both corporations and individuals.

In 2003, the central bank set up a credit supervisory bureau during institutional restructuring to enhance credit management and promote the construction of a comprehensive credit system in the society.

During financial management, the central bank also plays a leading role in the formation of the credit culture.

It guided the commercial banks to gradually build up an effective scheme for loan reviews and risk management. Bank clients were asked to provide true information of their status.

This year, the central bank will further improve financial management by using various monetary tools and enhancing the implementation of the monetary policies.

While gross credit volume is expected to grow moderately, the loan structure will be further adjusted.

To realize these goals, the central bank will strengthen window guidance. For projects that do not comply with the State industrial policies or those evading regulatory procedures, no loan will be provided and even those clients that had previously acquired loans will be corrected in appropriate ways.

Those applying for loans for construction projects in overheating sectors such as iron and steel, aluminum and concrete will undergo stricter examination and qualification approval.

The central bank will also enhance risk management for urban construction projects and risk monitoring in "key" industries, including iron and steel, automobiles, power, agriculture, real estate and infrastructure construction. These sectors will get closer attention and a relative risk warning system will be established to provide better information and policy guidance.

Moreover, commercial banks themselves should further adjust their loan structures and control fund flow into sectors with blind expansion and repetitive construction.

Meanwhile, enterprises in coal, power, petrol and oil and transportation sectors as well as major raw material suppliers should be guaranteed of funding.

As well, loans to help rural businesses and farmers, western development, the revival of the northeastern industrial base and projects for the public good and welfare must be encouraged.

Banks are encouraged to lend more to small- and medium-sized enterprises and further support consumption and employment. All these are expected to help upgrade the industrial structure.

Jin Yan: senior expert at the Research Bureau of the People's Bank of China 

(China Daily March 23, 2004)