Last month's rapid rise in bank loans makes it necessary to take more steps to rein in excessive investment growth in overheated sectors such as the real estate industry.
The State Council's call on Wednesday for tighter controls on investments and land use is an immediate response to the surprisingly strong growth of loans so far this year.
Latest statistics show that bank loans surged 209.4 billion yuan (US$26 billion) in May, nearly double the same period last year. And this rapid monthly growth has pushed the country's new bank loans for the first five months to 2.12 trillion yuan (US$262 billion), accounting for 85 percent of the lending target set by the central bank for the entire year.
At first glance, the Chinese economy's 10.3 percent growth in the first quarter seems to explain why banks have granted so many loans.
But special attention ought to be paid to this surge in banks' loans, given the nation's wish to fundamentally change its growth model.
Instead of being a boon, soaring bank loans to finance runaway investment growth might do a disservice to both the banking sector and the national economy.
With enormous loans being pumped into those sectors risking either overcapacity or bubbles, domestic banks increasingly expose themselves to bad loans that will emerge in large numbers when the economy slows down.
Meanwhile, extensive investment growth fuelled by bank loans also hinders the country's efforts to shift its economic growth pattern towards a balanced and sustainable one. The country is resolved to achieve energy-saving and environmentally friendly development, but the current extensive investment growth is making it more difficult to achieve this goal.
Breakneck investment growth has already been on the radar of macroeconomic control. An April interest rate hike and other administrative measures aimed at the property market bear full testimony to the central authorities' determination to cool down a rapid expansion in investment.
However, the financial data for May confirmed that previous tightening measures have not had the desired effect. Not that these measures are ineffective. The authorities need to further step up efforts to squeeze credit in order to control investment growth.
For a populous country like China, it is always important to maintain strong growth momentum to create enough jobs for its swelling labor force. In addition to this concern, a fairly low consumer price index, the main gauge of inflation, also pre-empts drastic tightening measures. Official figures indicated that the consumer price index rose 1.4 percent year-on-year in May.
Under such circumstances, the focus of macroeconomic control should be placed on structural adjustment.
The People's Bank of China has made it clear that it will strictly control bank loans to industries with overheated investment, as well as lending more money to support weak links in the economy.
That will be the best way to control money supply without hurting the economy.
(China Daily June 16, 2006)