Facing the still heating credit and investment growth, the People's Bank of China once again raised the reserve ratio on deposits. Overseas investment banks make prudent valuation of the possible effect this regulatory measure can produce. Economic analysts said on April 13 that the central bank has repeatedly exercised macro-control over the economy through monetary policies, but the problem of excess investment has not been solved fundamentally. The risk of a "hard landing" of the Chinese economy cannot be ignored and the nation needs a perfect financial system to control possible financial risks.

During the first quarter of 2004, China's already overheated economy, instead of cooling down, saw more investment projects kicked off, for investors hoped to catch the last train in disregard of the retrenchment policies, said Xie Guozhong, Asian chief economist with Morgan Stanley. Now it's very difficult to reduce the annual growth rate of fixed assets investment from over 50 percent to 10-12 percent.

A report published by Goldman Sachs on April 13 believed that the central bank's raising reserve ratio on deposits this time is unlikely to exert big influence on controlling credit growth, fixed assets investment and inflation, but it is a clear signal indicating that China is fully implementing its macro-control policy.

Statistics show that in the first quarter investment kept growing in industries such as iron and steel, cement and real estate. The investment growth rate for the iron and steel industry reached 172.6 percent, and the planned total investment for projects under construction in the cement industry rose by 133 percent in the first two months.

The investment bubbles may be bigger than those between 1992 and 1994, said Xie, particularly for real estate in Beijing and Shanghai, with soaring prices for raw and processed materials caused by increased investment. Xie believed that the present high prices for real estate and raw materials may not be real, and financial losses may be incurred once bubbles explode.

The Chinese economy will probably experience a "hard landing" once flowing capital or investors' confidence is sagging, Xie noted. There are now three factors that may lead to a "hard landing"-shortage of capital, deficiency of power and the disappearance of speculators.

Presently China is in no lack of flowing capital, which has kept streaming into the country since last year as proven by increasing foreign exchange reserve, but the fast growing investment in fixed assets may still cause shortage of funds.

According to Xie's analysis, the net investment in fixed assets last year amounted to US$500 billion, if the figure increases by 50 percent this year, an extra input of nearly US$300 billion will be needed. Domestic deposits by residents and the growth of enterprises' income can hardly keep pace with increase of investment, this means China needs more funds. But the capital funds flown into China are "fickle", for they invariably flow into places already flooded with funds, and stop or withdraw when funds are really needed. Some capital flew into China on the basis of an anticipated revaluation of the RMB, which may flee rapidly when investors discover that financing insufficiency has really appeared in the country.

The problem of power shortage will stand out more prominently because more investment projects need electricity, Xie pointed out. New projects and completed industries are in a relationship of competing for the limited amount of power, and because of power shortage, increased investment doesn't result in more output, but instead restrains some existing economic activities. The power shortage is very likely to plunge the Chinese economy into stagnation.

In the eyes of Xie Guozhong, real estate bubbles will hardly last long. He believes that the wave of investment in real estate has affected local people, but many domestic investors are not rational enough in their conduct of buying houses with loans, their income is not big enough to pay back their loans, so they must rely on rent for repayment. But the declining rent deprived them of profitable room and may finally lead to their bankruptcy. Speculators are quitting the market and the abundant housing supply will at last result in falling realty prices.

By People's Daily Online