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Fri, Jul 14, 2006 - Page 10 News List

Construction fuels China's runaway economy

OVERHEATING The countless construction projects in Changsha are just the most visible evidence of a nationwide investment binge that has the government worried

AP , CHANGSHA, CHINA

The projects sound innocuous enough: "Star Town," "Dingji Mountain Villas," "Rockefeller Center." A massive new traffic police headquarters. Sunhere International Mall, floor space sufficient to cover 123 football fields.

But the flurry of construction in Changsha, a Hunan Province city astride a cocoa-colored river that until recently was far removed from the industrial bustle of affluent coastal areas, is typical of the building frenzy that has Beijing's economic planners worried.

Banks, companies and local officials are pouring money into building luxury housing, shopping malls, showcase government buildings and factories, helping to push the rocketing Chinese economy to a better than 10 percent growth rate. More than two months after sounding the alarm about overheating, Beijing is having trouble slowing the pace.

"Chinese authorities are now scrambling to regain control over a runaway economy," Morgan Stanley economist Stephen Roach wrote in a recent report. "China needs a more serious policy tightening."

Driving home the urgency of the problem, state media reported this week that growth in the second quarter surged to a dizzying 10.9 percent.

Construction projects like the forests of cranes on Changsha's horizon are just the most visible evidence of a nationwide investment binge that raised new spending on construction and factory equipment to US$318 billion by the end of May, up 30 percent over the same period of last year.

Such investments are forecast to exceed US$1.3 trillion this year, nearly half of China's GDP.

To finance that spending, China's big commercial banks, their already fat cash balances swollen by government bailouts and recent multibillion-dollar initial public offerings, issued new loans worth 2.14 trillion yuan (US$267.5 billion) in the first half of this year.

The worry is that too much of the money is going into redundant or ultimately unprofitable investments, risking a rebound in bad loans and possibly a financial crisis.

Changsha, a city of 6 million, spent 2.4 billion yuan on construction in the first five months of this year, more than double the amount spent in the same period of last year.

"Investment is overheating. There's no doubt about that," said Qu Hongbin (屈宏斌), an economist for HSBC Corp in Hong Kong. "It's not only the scale but the quality or efficiency that we are worried about this time around."

Warning that growth shows scant signs of subsiding from the 10.3 percent rate seen in January-May, the government is attempting once more to clamp down on excess investment.

In its latest wakeup call, China's main planning agency issued a plea for more aggressive action to tighten credit and curb investment in real estate and factories, suggesting that the government levy a special tax on such spending.

So far, it's unclear whether the regulators can manage to override the local resistance and corruption that have undermined earlier tightening measures. A slew of recent lending scandals at top state-owned banks suggests that bank managers still often disregard newly implemented risk controls, bowing to political pressure to bankroll local projects.

That will mean more bad debts down the line.

In Changsha, the governor insists the building boom is mostly under control.

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