Maintaining healthy growth
By Li Fei (China Daily)
Updated: 2004-06-29 13:53

China's red-hot fixed asset investment spree has slowed down as the central government's macroeconomic control measures begin to bare their teeth.

However, fully achieving the goal of investment control will not be an easy task, according to Ma Xiaohe, director of the Industry Research Institute under the National Development and Reform Commission - the country's top economic policy-making body.

In the first five months, the investment growth rate has also been curving downward, according to latest statistics.

Total national fixed asset investment registered a monthly growth rate of 18.3 per cent in May, 16.4 percentage points less than April, a sign that the macroeconomic control measures have, to some extent, successfully reined in the surging investment.

"This is a healthy scaling down from supercharged growth to more regular growth," Ma told China Economic Times in an interview.

The investment surge has been created by several factors.

First, China has entered the middle phase of its industrialization, a situation characterized by the rapid development of heavy industry which is usually capital-intensive.

Moreover, this stage is coincidentally coupled with China's accelerated urbanization process, which has seen a phenomenal amount of investment poured into infrastructure construction such as transportation, power plants and telecommunication facilities.

Meanwhile, the middle and high-income groups in cities have upgraded their consumption, unleashing their demand for housing, cars and other high-end products.

This changing consumption pattern has contributed a lot to the development of the property and auto industries, which in turn has greatly stimulated investment in the raw material and energy sectors such as steel, cement, aluminium and electricity.

Second, China's economy is in an upswing, which has pulled significant sums of private and foreign investment into the manufacturing and service sectors.

Third, since China's pro-active fiscal policy was introduced in 1998, the central government has issued 800 billion yuan (US$96.4 billion) worth of treasury bonds, the majority of which was invested in infrastructure projects.

Finally, the excessive investment growth has much to do with local governments.

The sweeping government reshuffle, introduced at all levels since 2002, has led many local governments - under the newly installed leaders - to modify the economic development strategies that were set by their predecessors.

Many of them adopted the so-called "leap forward" strategy in their economic development blueprints, in which the more backward regions pushed to catch the developed regions while the latter worked to realize modernization.

Under such guidelines, those local governments set "attracting investment and business" as their utmost priority, tempting them into using their administrative power to support any profitable projects.

For example, the market has played a role in creating the current investment rush in the steel and auto industries, but without full support from local governments in terms of land use, taxation, credit and other policies, it would be hard for enterprises to enter such sectors.

Although such behaviour contributes to the local economy, it has led to widespread duplicated construction in some sectors at the expense of national interests.

Ma dismissed the notion that the central government's efforts to cool overheating sectors could hurt the economy's development momentum - a concern raised by academics and entrepreneurs alike.

The momentum will not be disrupted as long as the macroeconomic measures are aimed only at the overheated sectors, which is the case at the moment.

But Ma cautioned that the economy would be affected adversely if the current measures were not fully in place or were out of control.

Ma said concerns that the slowdown in fixed asset investment could diminish its contribution to the growth of gross domestic product (GDP) had to be put into perspective.

The cooling down of investment is a healthy correction, he said.

And despite the expected declining contribution to GDP growth, Ma is still optimistic that China's economic growth rate will continue at a high level. The investment downturn will be offset by the surging domestic consumption, which is booming.

A rebound in consumption and a reasonable investment increase are the goals of the government's macroeconomic control measures, Ma pointed out.

And now, the impacts from measures such as tightening land use approvals and raising commercial banks' reserves are beginning to show.

Based on this, Ma predicts that the fixed investment growth rate in the latter half of the year will be as high as 20 per cent, while the annual growth rate for 2004 will be around the same figure.

However, more needs to be done to fully bring the excessive investment growth under control and allow the current macroeconomic control measures to achieve their goals.

Given the extent and scale of the current macroeconomic control measures are spread wide enough, Ma cautioned the government against taking new actions, which could create uncertainty in the economy.

The crucial test for the current macroeconomic controls will be local governments, which should set aside regional interests to embrace national concerns when charting their economic paths.

Local governments rely too heavily on administrative power to push economic development, a practice that could be prevented by enacting restrictive laws or regulations.

While the excessive investment in some hot sectors needs to be curbed, the central and local governments should step up their investment in infrastructure projects in backward regions and expand the social security umbrella to cover more vulnerable groups, Ma said.

They should better co-ordinate their fiscal, tax, land use approval, investment and other policies.

And more importantly, local governments should abide by the policies set by the central government.

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