Government puts lid on overheating industries
By Fu Jing (China Daily)
Updated: 2004-03-23 00:52

In spite of repeated warnings, China's government-backed investment momentum has seen no signs of cooling down, but rather it is 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 per cent on a year-on-year basis.

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

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

In an unusual outspoken statement acquired 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 of resources and refuel mounting inflationary pressures.

The Chinese economy grew a robust 9.1 per cent last year, with fixed investments seen as the biggest driver in comparison to the other two growth engines of consumption and exports.

But there was over-investment in areas like steel, cement, aluminum as well as 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 the 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 measures to realize stable economic growth, the commission said.

Earlier this month, the commission put forth administrative and financial solutions to stop soaring investments in production.

It said it will generally stop approval of 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 per cent but investment by the local governments rose by 64.9 per cent 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 per cent 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.

He said the promotion of officials should not be mainly based on economic growth indices in the regions where they work. Instead, social development indicators, such as the jobless rate and income levels, should be considered.