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Beijing looks to apply brakes to investment craze

China's top executive body has ordered that no approvals for new steel, aluminum and cement projects be made this year in a bid to halt "haphazard" and "redundant" investments, state media said yesterday.

In its latest attempt to cool the economy, the State Council issued a circular that also called for a nationwide examination of nearly all ongoing investment projects including commercial offices, golf courses and shopping malls.

Xinhua news agency said the council, China's Cabinet, in addition wants the process of converting farmland for use in infrastructure projects to end "to curb the investment craze in some industries and to ensure the smooth operation of the national economy."

The orders are the latest in a string of administrative measures by central authorities to try to calm soaring investment by local government that is contributing to over-heating and over-investment in some sectors.

The efforts to curb economic growth, which Premier Wen Jiabao (溫家寶) said this week would be "forceful," have rattled neighboring countries that depend on China's booming economy, which grew 9.7 percent in the first quarter.

Financial markets across Asia have slumped, while sentiment has been dampened globally.

The government has been trying to cool investment for the past eight months through a variety of measures, including curbing bank lending and issuing administrative orders for clamp downs on inefficient and duplicated projects.

Most recently, the government reportedly ordered commercial banks to stop new lending activities ahead of the May 1 Labor Day holidays, a move interpreted by the markets as preparation for an interest rate hike.

Hong Kong's South China Morning Post, citing unidentified bankers, reported yesterday that China's central bank plans to raise lending rates by half a percentage point at the end of next week. The bank is also considering raising deposit rates by a quarter of a percentage point and held an emergency meeting yesterday to discuss measures to curb investment and slow economic growth, the report said.

China's central bank declined to confirm or deny the report.

Goldman Sachs Group Inc predicts rates will rise by as much as a percentage point within the next 12 months and Credit Suisse First Boston is forecasting increases totaling two percentage points by the end of 2005. Deutsche Bank and Standard Chartered Bank estimate rates will be raised by half a point this year.

"The government is likely to raise interest rates during the holiday," said Steven Xu, a Hong Kong-based economist at ICBC (Asia) Ltd.

He declined to say how big a move he expects.

China's benchmark one-year lending rate is 5.31 percent and was last raised in 1995, when it was increased by more than a percentage point to 12.06 percent. Inflation at that time was more than triple the current rate. The one-year deposit rate is 1.98 percent and was last raised in 1993, when it reached 10.98 percent.

Morgan Stanley's chief Asia economist Andy Xie (謝國忠) said that even a draconian clampdown on investment would probably not be enough to avoid a hard landing, but welcomed the government intervention.

"The overshooting of China's investment cycle has become so big that it threatens the country's stability. If China's leadership were not to take resolute actions, the national economy would spin out of control," he said.

"This is certainly the right moment to show who are in charge of the country."
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