China needs to take more aggressive actions to slow down the rapid growth in
lending and investment to prevent its economy getting overheated, said a latest
report from the National Development and Reform Commission.
Although it was still "too early to call the Chinese economy overheated", the
report completed by a research team headed by Wang Xiaoguang warned that this
was the time to "stay high alert".
Attributing the surging investment to the impulsive spending of local
governments and the influx of huge amount of funds from stock markets, real
estate sector and bank deposits where investment yields are either low or
unpredictable, the report held that the chances of an obvious slow-down in
investment growth for the second half of the year was "rather small".
It also pointed out a policy dilemma China may have to face in a long time
because of the incompatibility in its monetary policy and the exchange rates.
If the central bank raised the interests rates, more hot money or short-term
speculative capital would swarm into the country to take profits and force
Renminbi to appreciate. If the central bank took no action, however, more
capital would flow into the fixed assets market and lift up the producer price
index, intensifying the pressure of inflation.
Experts said that the dilemma is getting increasingly severe as China's
foreign exchange reserve has reached a new high of 895.04 billion U.S. dollars
by April, calling that the expanding trade surplus was "a major factor".
The report published on Tuesday in China Securities Journal said that the
People's Bank of China has planned to raise deposit reserve rate by 0.5
percentage points starting from Wednesday. This measure could alleviate to some
extent the excessive growth in money supply without stoking up the "anticipated
revenue" of hot fund, it said.
It also suggested that the central bank should issue more bills to specific
financial institutions to tighten the funds available.
When necessary, the government might also levy special taxes on fixed assets
investment which mainly refer to investment in construction and factory
equipment. The taxes should be imposed in line with China's industrial policies
so as to facilitate the industrial restructuring, it said.
"The purpose is to raise the investment costs of certain overheated sectors
and narrow their profit margin to ward off irrational expanding," said the
report.
Calling the above macro-economy adjusting measures "temporary", the report
stressed that to effect a permanent cure, China must go all out with its
economic system reform which involves the reforming of financial system,
exchange rate system, land system and transforming of local government's
roles.
