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Sun, Dec 14, 2003 - Page 12 News List

Power shortages spotlight China's myopic policies

Beijing's leaders appear to be intent on ignoring the warning signals that their economy is in trouble

By Keith Bradsher  /  NY TIMES NEWS SERVICE , HONG KONG

A man walks in front of an electricity-restricted Kentucky Fried Chicken restaurant on Thursday evening in Changsha, Hunan Province. Changsha residents spend one day of every four without power.

PHOTO: AP

Power plants in China cannot keep up with electricity demand, and so many steel mills are being built there that all the world's iron ore mines together may not be able to supply them adequately. Inflation, in the 12 months through last month, ran at the fastest pace in six years, and the country's money supply is rising 20 percent a year.

So what did China's leaders do last week?

Prime Minister Wen Jiabao (溫家寶) said in Washington that China was not yet ready to let its currency, the yuan, rise against the dollar in foreign exchange. Economists say that this means speculative money and foreign investments are likely to continue to pour into China, while exports keep rising briskly.

In Beijing, the People's Bank of China reduced the interest rate it pays on bank reserves in excess of the legal minimums. That easing of monetary policy, partly reversing a tightening that took effect on Sept. 21, will give banks an incentive to lend even more money to companies and individuals.

While China's leaders portray themselves as farsighted engineers who can manage their country's economic growth better than a democratically elected government could, their recent economic policies show a strong inclination to let the good times roll for now and to worry later about any ensuing bust.

Prodding the money supply through extra bank lending while resisting currency appreciation shows a reluctance to let economic growth falter at all, even as Western economists put China's expansion at an annual pace of 10 percent this fall.

"One of the things they'd be concerned about is too sharp a slowdown," said William Belchere, chief Asia economist at J.P. Morgan Chase.

But, he added, "If you're very preoccupied about social stability and you've got a weak banking system, do you really want to appreciate your currency?" he said.

Alan Greenspan, the Federal Reserve chairman, was accused in the late 1990s of letting the money supply grow too fast to accommodate American economic growth. Economists differ on how much this expansionary monetary policy aided the Internet boom and subsequent bust.

But Greenspan's management of the American economy then seems downright stodgy compared with the conduct of China's rulers now. Indeed, Greenspan warned in a speech on Thursday of a possible overheating of China's economy, "with its potential recessionary consequences."

The official New China News Agency said on Wednesday that electricity consumption leaped 15.6 percent in the first nine months as factories opened and people bought more appliances.

Blackouts are spreading: Some businesses in Zhejiang Province have to operate in the wee hours of the morning, and affluent residents in Changsha, in central China, have been buying generators for their homes.

China's steel output is already up 15 percent this year, to an estimated 190.5 million tonnes, making China the world's largest steel producer and leaving shipping lines and iron ore mines worldwide working day and night.

But Chinese provinces are already erecting additional steel mills with combined annual capacity of 108.8 million more tonnes. Even if iron ore can be found for these mills, China may have difficulty finding foreign markets for the steel.

The common denominator in many of China's economic problems is a dysfunctional banking system that still extends some loans based on the political connections of borrowers, especially state-owned enterprises. At the same time, the executives of state-owned enterprises have shown a strong herd instinct of rushing into whatever industry seems to be growing fastest. A result is that many provinces build the same kind of factories at the same time, as is now the case with steel, and bank officers approve loans for most or all of the factories.

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