As Li Xiaochao, spokesperson for the National Bureau of Statistics, summarized at a press briefing in the middle of October, the Chinese economy cooled down in the first three quarters of the year.

This conclusion is drawn from the drop in three key figures indicating economic performance. Gross domestic product (GDP), industrial output and investment in fixed assets all experienced slowed growth by the end of September, compared with their dramatic boost earlier this year. Over the same period, bank loan growth also declined.

Obviously the central government's macro-control efforts have worked and the overheated economy is temporarily recovering at a reasonable pace.

According to economic theories, there is a simple standard to judge whether or not an economy is overheated. As long as the economy does not outgrow a specific growth rate, it is in a normal condition. When that ceiling is broken, the economy is overheated.

The standard usually applied in China in recent years is 8 per cent or 10 per cent for annual growth of GDP. Thus, the GDP growth achieved in the third quarter, 10.4 per cent, makes the economy still look like it's overheated.

However, a country's economy is influenced by so many factors that the standard for measuring it should also be complicated. And different results could be reached using different frameworks.

There are therefore big questions to ask: Which of these standards should be adopted? Does the standard reflect the real situation in China? Would it fit into the different regions of the country?

Beyond the figures indicating economic growth, what really matters is whether the economy is in good shape. A most fundamental criterion to judge if a market economy works well is the degree of freedom the businesses and individuals enjoy in their economic decisions.

When businesses and individuals can make choices according to their estimates about the market, resources can be allocated efficiently because they have to shoulder all the consequences of the decision. Businesses in regions where the market economy is better developed, like Guangdong, Zhejiang and Jiangsu provinces, are able to invest based on market information.

It is not the case when the economy is under the control of government.

The fervent growth of fixed-assets investment in recent years is the result of governmental control over the economy.

The control is especially strong in the inner regions of the country. The provinces with rocketing fixed-assets investment were Jilin Province in Northeast China, Anhui Province in East China and Henan Province in Central China, each of which achieved a growth rate of between 45 per cent and 50 per cent.

Because of strong governmental control over the economy, figures indicating a cool-down may not give us the full picture.

As long as local governments continue to keep a tight grip on the economy, it will be easy for them to manipulate it. Local governments can reduce or promote investment by issuing or not issuing licences to projects.

Therefore, the ups and downs in the economic performance indexes are probably an outcome of such manipulation according to current targets of the central government's macro-control policies.

In other words, the changes in the latest statistics, fitting well into the decision-makers' expectations, are probably only temporary. As soon as the central government eases its strict macro-control policies, the economy will likely regain its heat.

One sign in support of this prediction is that the real estate industry, the major powerhouse of economic growth, has not stopped growing in recent months despite the macro-control policies and the slowdown in fixed-assets investment growth.

Investment in real estate increased by 24 per cent in the first eight months over the same period last year, while the same figure in 2005 was 19.8 per cent. When the central and western parts of the country are viewed separately, every province or region had a jump of more than 30 per cent in its investment in real estate development during the period.

Therefore, the real estate sector has not seen any noticeable decline in its growth despite the authorities' efforts to cool down the economy. To make things worse, this sector in the central and western provinces had prospered. It is impossible to curb economic overheating when the real estate sector continues its robust boom.

On top of that, a closer look at bank loan growth is also worrying. The total bank loans have ceased increasing dramatically, but the reduced growth is mainly caused by shrinkage in short-term loans. Mid- and long-term loans are still growing.

That is to say, commercial banks are also making the necessary arrangements according to the policy target of macro-control by the central government. After several State-owned banks issued their stocks on the securities market, they would be forced to grant more loans with the money pooled through the issuance. Thus, the banks would be strongly motivated to give out more loans and support a new round of investment expansion.

To sum up, the most eminent driving forces for economic growth are the investment pulse of local governments in the real estate sector, the bank loan boom after the State-owned banks get listed and accelerating urbanization in the country. The authorities may have to make extra efforts to really bring down the economic temperature if they do not change these factors.

A final key question to consider is which of the two should be the promoter of the economy the market or the government?

Source: China Daily; By Yi Xianrong, the author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences