One of the biggest challenges
the government now faces is how to cool investment, the major engine in the
fast-growing economy for over a decade.
Behind the 10.9 per cent economic growth in the first six months of this
year, concerns over overheating are mounting.
Fixed asset investment growth further accelerated, to 29.8 per cent during
the period 4.4 percentage points higher than that of the same period last year,
the National Bureau of Statistics said yesterday.
That compares to a 27.7 per cent growth rate in the first quarter and 25.7
per cent in 2005.
It is hoped that investment growth can be reined in the second half of the
year, as macro control measures gradually take effect.
However, economists are not optimistic.
Many new construction projects are still to break ground, and with 2006 being
the first year of the latest Five-Year-Plan another round of mass building is
expected across the country.
Local governments don't want to see a slow-down in investment, which could
weaken their local economic growth rates.
And it isn't easy for banks to adjust to the tight credit environment and
curb lending to big projects when their capital adequacy and liquidity are at
their strongest ever.
Even with credit curbs, investment enthusiasm is unlikely to fall, said Yi
Xianrong, a financial researcher with the Chinese Academy of Social Sciences.
Many projects will be able to find alternative funding sources to bank loans,
he said.
As Yi sees it, the best way to cool down the growth in investment is interest
rate hikes. And they should go into effect as soon as possible.
"It is unlikely we'll see a substantial slow-down in investment growth in the
second half of the year if the central bank does not order an interest rate
hike," he said.
There was wide speculation of an imminent interest rate hike even before the
second-quarter figures came out yesterday, but the government has not yet
announced one.
Real estate remains in the spotlight in the anti-overheating campaign.
The sector reported a 24.2 per cent growth in investment during January and
June, 0.7 of a percentage pint higher than a year ago.
Total investment in urban real estate development reached 769.5 billion yuan
(US$96.2 billion) in the period.
Investments in coal-mining, oil and natural gas exploitation, and rail
transportation expanded by 45.7 per cent, 30.3 per cent and 87.6 per cent
respectively in the first half of the year.
"Prosperity continues but problems also accumulate," wrote Chen Jijun, a
macro economics analyst with CITIC Securities, in a monthly report to clients in
mid June.
His report indicates that excessive investment growth in certain sectors
demands more attention and tightening measures.
And his concerns are shared by the government also in mid June, after the
release of the May figures, the State Council said it would strictly control the
scale of urban construction and the number of new projects in real estate and
sectors with excessive capacity.
Meanwhile the central bank urged domestic banks to control medium- and
long-term lending and improve their loan structures. On July 5 higher reserve
requirements were introduced for banks.
It will take time to see exactly how much these tightening measures will
affect investment growth, but most economists agree there is still much more to
be done to upgrade the nation's economic structure.
Chen estimated fixed asset investment growth at around 28 per cent for the
whole year.
The State Information Centre estimated 27 per cent, a minimum level to
support the fast economic growth.
As the economy is expected to continue to boom in the second half of this
year and next year, the government will undergo more tests of its ability to
tame investment growth and lift economic efficiency.
