China's investment sector shows signs of overheating

Home>>Business

Last updated at: (Beijing Time) Friday, December 19, 2003

China's investment sector shows signs of overheating

As the year-end draws nearer, investment, the main engine of China's economy, is slowing as the growth of capital investment dipped for the fourth consecutive month in November.

DISCUSSION

CHINESE

SEND TO FRIEND

As the year-end draws nearer, investment, the main engine of China's economy, is slowing as the growth of capital investment dipped for the fourth consecutive month in November.

Official estimates showed that the annual growth of investment in fixed assets is 23 percent for the whole year, contributing to 60 to 70 percent of the growth of gross domestic product (GDP).

Tang Ming, chief economist of the Asian Development Bank (ADB) Resident Mission in Beijing, said the real growth rate of capital investment in the first three quarters of the year was higher than that in the overheating period of 1993-94.

The reasons for the current surge of investment, nevertheless, were quite different. Non-governmental investment had become the mainstay in capital expenditure.

The ADB estimates private enterprises spent over 20 percent more on capital investment than last year. The growth rate of investment by collective-owned or solely-owned businesses also picked up by 8 to 9 percent.

ADB resident representative in China Bruce Murray said it was both healthy and normal to increase the share of the private sector in investment growth. A mostly government-driven growth of investment would be unsustainable, he added.

Government expenditures accounted for a mere 2 percent of China's total domestic capital investment, which would reach 5.3 trillion yuan (some 640 billion US dollars) this year.

This showed the internal vitality of the economy was growing as the government's stimulative policy continued to take effect, said Ma Kai, minister in charge of the State Development and Reform Commission (SDRC).

However, blind investment in certain industries and pent-up risks of bad loans have already drawn the attention from the Chinese government. Investment in redundant capacities in industries such as steel, auto manufacturing, aluminum and cement has become protruding this year. For example, on-going and planned construction projects are expected to expand production capacity of automobiles to over 10 million by 2007. But the market size is estimated at 7 million that year.

Rapid expansion of these industries puts great strain on energy and raw materials supply, pushing up prices. Tang said price hikes of capital goods such as electric power, coal and rolled steel had already showed signs of inflation.

Since most investment in redundant capacities was funded with bank loans, the risks of non-performing assets of banks was accumulating. In the first seven months of the year, the annual growth rate of fixed asset investment peaked at 32.7 percent, while the increase in bank loans exceeded the total in the previous year.

In order to tackle the problem, the Chinese central bank raised the deposit reserve requirement for banks and tightened scrutiny of loans to the real estate development sector. The government also embarked on a nationwide campaign to rectify blind investment and excessive land development.

As a result, the growth rate of capital investment began to slow gradually in August. At the same time, the growth of bank loans dropped for three consecutive months up to November. Investment in real estate development also declined from a 34.9 percent growth in the first quarter to 32.5 percent by the end of November.

Murray said the size of China made it impossible to use the word "overheating" to describe the economy or the investment sector as whole. In central and western parts of the country, demand for investment in infrastructure development was immense. The ADB was planning to channel most of its loans to China into construction of transport infrastructure in these areas in the next five years.

The Chinese government made an appropriate choice in maintaining the continuity and stability of its macro-economic policy next year, he acknowledged. The SDRC reckoned China would continue to implement a pro-active fiscal policy while readjusting the utilization and scaling down the size of issuance of treasury bonds in 2004. The money from T-bond issuance would be used mainly for economic restructuring and inclusive social development instead of promoting the speed of economic growth.

Noting that the Chinese government had sent a signal by setting the estimated growth of GDP at 7 percent and growth of capital investment at 12 percent next year. Tang said it meant China would not seek growth at all costs but pursue a comprehensive, inclusive and sustainable growth.

Questions?Comments? Click here

China's direct overseas investment totals US$29.92 billion

China to succeed in cooling down heated economy: analysts

Hot sectors cooled by green limits

China opposes foreign interference on HK affairs: Official ( 54 Messages)

China seeks int'l support in counter-terrorism ( 12 Messages)

Former Iraqi President Saddam Hussein arrested ( 101 Messages)

Nanjing Massacre remembered ( 54 Messages)

Abandoned Chinese babies find love from foreign parents ( 3 Messages)