China to slow growth in select sectors

Friday, December 26, 2003

SHANGHAI, China -- After years of breakneck growth, China announced steps Thursday to reduce a feared overexpansion in some industries that is causing energy shortages and could lead to financial problems.

The Cabinet issued orders to curb spending on construction, factories and equipment by slowing down approvals for projects, the official Xinhua News Agency reported.

It gave few details but said President Hu Jintao and other leaders, meeting Christmas Eve, also agreed to "limit market entry" -- a possible reference to banning new competitors in some fields.

China's economy has been expanding by more than 8 percent a year, helped by heavy government spending. Official outlays were especially big this year to counter the impact of China's outbreak of severe acute respiratory syndrome, which hurt travel and retail businesses.

After several years of trying to prop up economic demand for fear of falling prices and an economic slump, China now faces the opposite problem, worrying that heavy spending on real estate, factories and other investments could cause prices to spiral out of control.

"Credit and money supply are growing too fast. If this continues, China risks further overinvestment and asset price and consumer price inflation," said Robert Subbaraman, an economist at investment bank Lehman Brothers in Tokyo.

"They want to tap on the brakes but don't want the economy to come to a screeching halt."

Leaders also want to relieve shortages of power, coal and oil that have plagued Chinese cities this winter and to ensure food supplies for the Lunar New Year festival in January, China's biggest holiday, Xinhua and other state media reported.

The announcement comes amid official warnings that Chinese businesses are investing too much in steel production and other fields, raising the risks of an industrial glut and financial problems.

The power shortages are signs that demand for resources may be outstripping supplies.

"China is trying to slow its economy to a sustainable pace as it faces up to resource constraints and structural imbalances," Andy Xie, managing director at Morgan Stanley, wrote in a recent research report.

The government has been trying to rein in what it terms "blind investments."

Banks have been ordered to raise the ratio of deposits that they hold as a percentage of loans and to cut credit to developers building luxury apartments and commercial complexes.

But investment has soared, jumping by 29.6 percent in the first 11 months of the year, according to the government.

The Cabinet also agreed to a new strategy aimed at helping the poorer countryside, shifting revenues from government bond sales to build public health facilities, irrigation and other rural services, Xinhua said.

Until now, the billions of dollars raised from government bonds has mostly gone into urban areas -- overhauling state industry and building expressways and other infrastructure.

Improving rural incomes would also help boost flagging demand for consumer goods among the less affluent 600 million of China's 1.3 billion people living in the vast countryside.

To reverse a decline in grain harvests, the government will cut farm taxes, guarantee supplies of agricultural materials -- such as seeds, fertilizer and pesticides -- and apply "preferential policies" to grain growing provinces, the report said.

Investment would be focused on the less developed, inland western regions of the country, it said without providing further details.

Whether the central government's shift in policy will actually curb local spending and investment is unclear, given the strong incentives profiteering local officials have to boost tax revenues and sell land to investors.

"It's become more difficult than for many, many years to forecast where the Chinese economy is heading," says Subbaraman of Lehman Brothers.

"There are good arguments why it should boom and equally good arguments why it should slow down."

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