Op-Ed Contributors

High interest rates can check investment spree

By Liu Yuhui (China Daily)
Updated: 2010-04-16 08:19

Editor's note: The author speculates a long-term interest rate hike will likely occur in the near future in China.

A mammoth investment campaign has been launched in China as a preferred weapon for tackling economic slowdown amid the global financial crisis.

The Chinese government recently gave the green light to quite a few high-speed railway lines, which will mark the country as having the longest high-speed railway mileage in the world by 2012. The enthusiasm in the field has also been rising in a number of local regions. Jiangsu province is reportedly planning to start 11 subway lines very soon and related construction is under way in 14 cities across the country. Large-scale, light-rail projects are also being planned in another 18 cities.

Some Chinese experts attribute the country's accelerated investment in infrastructure to its enormous deposits. They believe there is no more suitable channel for China to invest its savings than in infrastructure. In saying thus, they turn a blind eye to the basic fact that ordinary Chinese people have long endured expensive public services, high taxes and low interest rates.

The utilization rate of China's highways is only 12 percent of the average of other Asia-Pacific countries. Some small airports throughout the country are only utilized to half their capacity. China's burgeoning high-speed railway network has failed to bring the country expected economic effects. To shorten the journey by only 20 minutes, a high-speed railway worth 10 billion yuan was built between Shanghai and Hangzhou against the wishes of many residents. But the costly project caused an annual loss of 700 million yuan to the local government.

Ensuring moderately fast economic growth, pushing for economic restructuring and reining in inflation remain top priorities on government agendas.

Despite the adoption of an equilibrium credit policy, government spending has increased by a large margin without any signs of lessening. In the first quarter of this year, the country's credit volume hit more than 3 trillion yuan. Eighty to 90 percent of this year's lending is on a middle and long-term basis, as opposed to last year's.

Ordinary people are facing the dilemma of a deep fear about possibly high inflation and the pursuit of high returns, because of the country's current macroeconomic policy.

That can best explain the panic buying of houses in Beijing and Shanghai, following the conclusion of this year's two sessions of the National People's Congress and the Chinese People's Political Consultative Conference.

The trend is based on the widespread assumption, either among ordinary people or among government officials, that China's development will advance on the normal track if the country maintains its economic growth momentum. Such an assumption has resulted in the formation of the cycle of investment, economic growth and more investment.

There is a view that catastrophes will emerge should China's economic growth speed be kept under 8 percent. A lower economic growth rate will render China's newly built infrastructure futile and see overcapacity in the country's manufacturing sectors for a few years. As a result, the country's real estate bubbles will bust and its banking system may face large bad debts.

Ordinary investors firmly believe that the government will not stand idle for housing bubbles to burst or slow the country's fast-driving economic locomotive. Such a view has significantly contributed to property speculations nationwide.