Restraint from excessive investment urged
By Xu Binglan (China Daily)
Updated: 2004-04-26 08:45

A senior official from the central bank yesterday called on local governments and enterprises to refrain from supporting or engaging in excessive investment activities to avoid triggering tougher measures by the central bank in its effort to cool down the economy.

"The economy is overheated if measured by the sustainability against the availability of resources," said Wu Xiaoling, vice-governor of the People's Bank of China.

None of the nation's energy, water and land resources can support the current growth rate, she said on a panel at the Boao Forum for Asia.

China's economy grew 9.1 per cent last year and 9.7 per cent in the first quarter of the year.

Fixed asset investment growth topped 40 per cent during the first quarter, which alarmed economic policy-makers and observers.

"Everybody should control himself. We need efforts both at central government level and the local level (to tame the overheating economy)," Wu said.

"If we come to a point when the central bank has to take tough measures, that will not be good for anyone."

Harsh moves may bring big fluctuations in the growth rate, she said.

The central bank began to take steps to restrict credit growth last year, mainly by raising the required reserve ratio for financial institutions engaged in the lending business. The latest move was announced earlier this month and took effect yesterday.

Wu described the steps as "mild".

But she sounded somewhat worried that local governments and companies were not heeding the central bank's call and are still launching unnecessary projects.

Some local governments are just preoccupied with having a rapid growth rate and supporting grand projects to showcase what they believe are their economic achievements.

Many local companies are simply unable to adequately judge the feasibility of these undertakings and often launch redundant projects.

But the central bank doesn't seem ready to use other measures such as an interest rate hike to control credit growth.

"We have to take into consideration both internal and external factors in changing the interest rate."

The central bank is afraid that a higher renminbi interest rate will attract more speculative funds into China, which would force the central bank to spend more renminbi to buy foreign currencies and keep the renminbi's exchange rate stable.

The renminbi the central bank has  put onto the market to buy foreign currency has been a counter-force to the central bank's efforts to restrict credit growth.

The inflow of speculative funds will also increase pressure on the renminbi to appreciate, which the central bank would not like to see, she said.

Wu said the central bank is now more concerned with the improvement of the exchange rate mechanism than whether the renminbi should be revalued.

Stephen Roach, Morgan Stanley's chief economist, was more straight-forward.

"I don't share the view in the US that the renminbi should be revalued," said Roach, who was also on the panel.

The demand only reflects the political need for a scapegoat for the mistakes made in American economic policy, which has caused the huge American trade deficit, he said.

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