A new administrative drive to tame run-away investment growth is under way. It is a necessary move to suppress the investment binge: investment, which surged by an annualized rate of 30 per cent during the year's first half, has been the leading force pushing the economy ever closer to overheating during the past three years.
However, policy-makers should be well aware that they cannot expect to always rely on such campaigns to manage the economy.
In addition to measures making local officials more willing to follow the central government's policies, more effort should be made to form an environment in which enterprises are responsive to market-oriented measures, such as changes to interest and currency exchange rates. This demands that the nation pushes ahead with its unfinished agenda of reforms in the banking sector, State-owned enterprises and the pricing system for products such as oil and electricity.
Earlier this week, the National Development and Reform Commission (NDRC), joined by four other ministries and government agencies, issued an urgent policy directive to local governments demanding they review large projects launched this year. Projects that are not in line with the policies and rules should be halted and are only to proceed after being modified according to government requirements.
Newly launched projects, of course, bear the brunt of this initiative but the real goal is deterring new violations.
The move is reminiscent of a similar crackdown in 2004 over disobedient investors.
However, two years on, the benefits of that drive are difficult to see.
The spectre of overcapacity is looming again in such sectors as aluminium, explicitly named in 2004 as an area subject to strict control. Credit growth has rocketed. Environmental standards continue to be disregarded and the illegal seizure of farmland for industrial use is rampant in some provinces.
It is no surprise that administrative measures are not efficient. As one NDRC official puts it, no matter how forceful the administrative measures are, enterprises will still furtively launch new projects as long as there are profits to make.
On the other hand, if the administrative measures are too harsh, they could hurt economic vitality, which may not be easily recovered.
The long-term solution to that dilemma lies in market-oriented instruments.
During the past two years, the central bank's manoeuvres to slow down loan growth which included slight increases in interest rates and in the proportion of commercial banks' funds required to be put on reserve have achieved insignificant results.
Bolder interest rate hikes were precluded due to a fear of an influx of more hot money. A currency with a more flexible exchange rate was not in policy-makers' toolbox either, especially given the continued inability of banks, firms and capital markets to cope with more radical changes to the renminbi's value.
Policy-makers should have a sense of urgency in deepening reforms. Otherwise, they will continue to face the daunting challenge of managing the economy with non-market-based measures.
(China Daily 08/04/2006 page4)