Overinvestment still unchecked
By Fu Jing (China Business Weekly)
Updated: 2004-04-25 14:16

Amid government's repeated warning of too much investment since last summer, money still washes into some sectors and the enthusiasm of local governments and enterprises sees no sign to be chilled out.

China's fixed-asset investment reached 879.9 billion yuan (US$106 billion) in the first quarter, up 43 per cent over the same period of last year, said National Bureau of Statistics spokesman Zheng Jingping.

Zhang said fast investment growth is one of the protruding problems that troubles China's economy, which achieved a 9.7-per-cent growth during this year's first quarter.

Some regions and industries still made rush investments and copycat construction which have led to price increases of raw materials, energy and transportation, he said.

China's investment in fixed assets increased 53 per cent over the first two months of 2004 compared with the same period last year, hitting its highest level in a decade.

This wave of investment has become a national craze. Statistics show that input in the eastern region increased 58.6 per cent, 47.3 per cent in central China and 44.3 per cent in the western region.

Investment in three industries - steel, aluminium and cement - soared rapidly early this year despite government's repeated warnings on overinvestment.

Investments in steel hiked 172.6 per cent in the first two months of this year, according to the National Development and Reform Commission (NDRC).

Some 78.6 billion yuan (US$9.5 billion) is expected to be invested in all the cement factories under construction now, a year-on-year rise of 133 per cent, the NDRC said.

The NDRC said China would be able to produce 330 million tons of steel annually beginning from 2005, if all the steel factories under construction now were finished, but the domestic demand will not reach 330 million tons till 2010.

Overheated investment is the continuance of last year's input upsurge. Many projects were left to this year to be completed, and construction has been accelerated by developers due to worries about projects being reined in and increases in the price of raw materials.

In a recent State Council executive meeting presided over by Premier Wen Jiabao, the central government warned of excessive investment in some sectors, too many new construction projects, and copycat construction projects.

The central government and experts fear that overheated investment might provoke the crisis of energy and raw materials shortage, thus leading to price increases, especially prices on resources that China imports. And the unbalanced distribution of resources will finally threaten the country's economic stability.

Therefore, cabinet departments on economic planning, banking and land management have been trying their every possible means to curb further increase.

The latest solution was stepped up by the central bank and the securities watchdog.

Worrying that rapid credit growth may fuel inflation, the People's Bank of China raised reserve requirements, which will take effect on April 25, for some commercial banks by half a percentage point to 7.5 per cent late last month.

The bank announced recently an across-the-board increase in reserve requirements, also by half a percentage point, for all financial institutions except credit co-operatives.

The central bank said the hike will freeze an estimated 110 billion yuan (US$13.3 billion) in commercial banks' reserves.

China Securities Regulatory Commission has put strict supervision on the financing channels for listed steel and cement companies. And the Ministry of Land and Resources has begun checking illegal trades in local real estate markets.

But experts said these measures cannot stop the frenzied efforts of investors.

Lin Yueqin, a researcher with the Chinese Academy of Social Sciences (CASS) said great dangers are underlying the investment boom, though domestic demand is dynamic now, adding that many projects being built in the three overinvested industries are "low-level copycat construction" with poor efficiency, which consume more energy and cause severe pollution.

Lin said the current situation is like a tug-of-war between the central and local governments to vie for the guide of economic development. Despite the government's strict measures, local developers try every possible means to kick-start their constructions.

The total investment by the central government rose by 12.1 per cent in the first two months while that by local governments up 64.9 per cent, 24.7 percentage points higher than the growth of the same period last year.

Some local governments still focus too much on gross domestic product growth and believe in investment growth as a method to push the local economy, Lin said.

"Drastic measures should be taken to strengthen macro control on investment, and the government must impose stricter controls on the trade of land resources. Without land, projects could not be constructed," Lin said. "Driven by high profits, the investment growth will not slow down without powerful government intervention."

The central government has sent 10 inspection teams to 20 provinces, autonomous regions and municipalities to seek solutions for the investment growth.

Some experts suggest the government be cautious about its policies.

The government should differentiate the real demand from investment bubbles and take up solutions accordingly, said Liu Shucheng, with the Economic Institute of the CASS.

Some industries might be overheated due to a real shortage in the market, while the others, for example, steel, are pushed by speculation, Liu added.

Xu Hongyuan, vice-director of the Development and Research Department under the State Information Centre, said the overinvestment is not easy to chill and investment will still become a leading force for the country's economy this year.

He said Chinese economy is expected to grow 9 per cent this year, compared with the government's target earlier this year of 7 per cent growth rate.

He said the growth rate of the national economy is likely to exceed 10 per cent during the second quarter of this year, as against 9.7 per cent for the first quarter.

The economy will slow down to at least 8 per cent during the second half of this year as the central government moves to regulate the macroeconomy and the average growth rate for the economy in 2004 will stand at about 9 per cent, Xu said.

The Chinese Government set the 7-per-cent growth rate target earlier this year, which, if realized, will enable China to reap some 12 trillion yuan (US$1.45 trillion) worth of gross domestic product in 2004.

The low-profile growth rate was set in a bid to ease the pressure on resources and environment after years of rapid economic growth, and put an end to the practice of solely seeking a high economic growth rate, which was 9.1 per cent last year despite the outbreak of the severe acute respiratory syndrome.

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