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Mon, Aug 14, 2006 - Page 10 News List

PRC tells provinces to temper growth

SIZZLING HOT While the central government wants to rein in fixed-asset investment to head off inflation, local bureaucrats prioritize growth to lower risk of social unrest


Construction workers take a break near an artist's impression of an office building to be constructed at the site in Beijing yesterday. China recently ordered an urgent review of investment projects, stepping up efforts to cool off its sizzling economy.


China has called on its 31 provinces to rein in their economies, state media said yesterday, in a sign the central government has yet to persuade local bureaucrats that red-hot growth is bad.

Vice Premier Zeng Peiyan (曾培炎) emphasized that investment in factories, residential buildings and other fixed assets must be cooled down, according to the Xinhua news agency.

"The central government has made explicit requirements on economic work in the second half," Zeng said during a recent trip to Yunnan Province.

"Fixed-asset investment should be put under tight control and more efforts made to lower energy consumption and improve environmental protection," he said.

China's economy, the world's fourth largest, expanded 10.9 percent year-on-year in the first six months of the year, boosted by massive investment.

Significantly, Xinhua said 90 percent of all investment in the first half had been approved by governments at provincial level or below, reflecting different agendas in Bei-jing and elsewhere in the country.

Whereas the central government is concerned about macro-issues such as inflation and other symptoms of overheating, local governments prioritize growth because it means more jobs and less risk of social unrest.

Beijing may have awesome formal powers but its actual clout over decisions made hundreds of kilometers away is limited. In reality local officials are frequently calling the shots, according to observers.

"Local government dominance in China's economy appears the most important factor in China's macro-behavior," Andy Xie (謝國忠), a Hong Kong-based economist at Morgan Stanley, said in a recent research note.

In the complex game between Beijing and the provinces, the provincial players have important tactical advantages, Xie said.

"Local governments can create a fait accompli by starting numerous projects to deter macro-tightening by the central government, as cutting off liquidity would keep these projects unfinished," he said.

"Second, local government leaders often have a more senior rank than their regulators in the Communist Party hierarchy and, hence, have a major say in macro-policy," he said.

The economies in three-quarters of China's provinces expanded at 12 percent or more in the first six months, above the national figure of 10.9 percent, its key economic planner said in a report last week.

Moreover, local banks, often outside Beijing's direct supervision and control, have also continued lending to investment projects.

Commercial banks extended 2.34 trillion yuan (US$290 billion) in the first seven months of the year, according to statistics from the People's Bank of China.

This means the banks have used up 94 percent of the total loan quota of 2.5 trillion yuan they have been given for the whole year.

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