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Further Tightening Needed
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The Chinese economy's stunning 11.3 percent year-on-year growth in the second quarter of 2006 justifies more tightening measures to take the steam out of this expansion.

The latest statistics indicate that China's year-on-year economic growth accelerated to 10.9 percent in the first half of 2006. Accompanied by a fairly low consumer price index which rose only 1.3 percent from a year earlier, the Chinese economy seems to be traveling along the road it has taken for more than two decades.

However, the nation's policy-makers have grown increasingly uneasy with this type of rapid growth.

As a central part of the nation's pursuit of sustainable development, the Chinese government has made crystal clear its intention to lessen the economy's reliance on investment and exports for growth, while boosting domestic consumption.

This decision is definitely pertinent to both domestic realities and international conditions. Our limited resources and fragile environment mean that China has no choice but to embrace a new growth model that is more balanced, energy-saving, environmentally friendly and efficient. Meanwhile, to assume the greater responsibility associated with its rising economic power, China is eager to reduce trade imbalances with other countries while serving as a growth engine for the world economy.

However, the current expansion fuelled by soaring investment and export growth means that China is not moving in the direction of fulfilling its sustainable development goals. If the trend of excessive investment growth cannot be promptly checked, the country risks drifting further away from its long-term development goals.

According to the National Bureau of Statistics, China's gross domestic product between January and June reached 9.14 trillion yuan (US$1.14 trillion).

One driving force is the investment in urban areas that reached 3.64 trillion yuan (US$455 billion) in the past six months, an increase of 31.3 percent, the highest growth since the second half of 2004. Another is net exports, which tripled last year, and this year have so far shot up 55 percent year-on-year.

Being an emerging manufacturing centre for the global economy, China's ballooning trade surplus can largely be explained by the value-added nature of its processing trade, which now accounts for half of the country's total trade volume. As more and more foreign investors set up companies in China to manufacture for global supply chains, such trade volume will only increase.

The investment frenzy is a much more serious cause for concern, especially when it continues despite the slew of government measures to ease investment growth.

Admittedly, the economy has not been choked by an energy shortage this year thanks to strengthened capacity-building in the energy sector. However, accelerated investment in many more industries has made overcapacity an imminent threat to the national economy.

In addition, new loans made by Chinese banks in June fell 102.7 billion yuan (US$12.7 billion) compared with the same period last year. This is an initial sign that investment growth may have started to slow down.

However, given that previous tightening attempts proved fruitless, it is still too early to say that efforts to cool off this rapid expansion are taking hold.

(China Daily July 19, 2006)

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