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Home >> Business
UPDATED: 08:06, July 05, 2006
China needs to rein in growth in investment, lending
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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.

Source: Xinhua


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