Investment efficiency is key to sustainable growth
Macroeconomic figures for the first half of this year show that controlling runaway investment has become an urgent task for policy-makers.
According to an August 7 report by the National Development and Reform Commission, the country's 31 provinces and regions all registered a two-digit gross domestic product (GDP) growth rate in the first six months of the year. Investment in seven provinces had grew by more than 40 per cent, and two of them saw their investment growth exceed 50 per cent.
It has become imperative that macroeconomic regulators rein in this dazzling pace of investment growth.
We need first to analyze what factors are behind the rapid GDP growth so that solutions can be found on that basis.
Investment must be backed up by an ample supply of capital. It is obvious that the money supply in the first half of the year has been generous, laying the foundation for the fast growth in fixed asset investment.
On the other hand, given that environmental and resource costs have not been fairly included in the operation of businesses, the return on investment has exploded and investors can pocket huge profits, which in return attracts more investment.
This is the rationale for the investment resurgence in some sectors.
In terms of regulation, the fast investment growth is a result of loose policy implementation.
Some localities have failed to carry out the industrial policies faithfully and to abide by laws and regulations on environmental protection, land management, project approval and production safety.
A recent survey by relevant central departments in some regions shows that about 40 per cent of projects with an investment of more than 100 million yuan (US$12.5 million) have failed to undergo proper procedures for environmental impact assessment, requisitioning of land and project approval.
Since there are multiple factors behind the fast investment growth, we should resort to a package of measures, including administrative, economic and legal actions, to rein investment in.
The fast investment growth is a serious problem, but more serious is the poor efficiency of investment, which leads to waste capital.
The low investment efficiency, coupled with the large scale of investment, has become a potential bottleneck for the long-term development of the Chinese economy. The resource pressure is worsening and will increase the costs of sustainable economic development. Moreover, the quality of investment may not be ensured. The low investment efficiency brews potential economic risks as well, and as the market conditions change, those risks may transform into risks for corporate management, increase bad loans for the banks and affect social stability.
Admittedly, if the efficiency of investment could be improved, a relatively fast investment growth would not become such a serious problem. But the fast growth rate would become dangerous if the efficiency of investment could not be improved, or were to further decline.
Improvement of investment efficiency under the guideline of a scientific development mode, therefore, should be the focus of our macroeconomic regulation.
In the first place, bank credit should be tightened appropriately. Given the correlation between credit and investment growth, it remains important to rein in bank credit in order to prevent investment from re-surging.
The commercial banks, especially, should be made cautious in extending loans to industries that consume large quantities of resources and produce much pollution.
On the other hand, further raising the interest rate can be considered to increase the costs of investment.
Regarding consumption of resources, the costs must be raised so that prices can balance investment and protect the environment.
If an effective pricing mechanism cannot be put in place, the wasteful use of resources would become inevitable, and in turn boost irrational investment.
Therefore, it is necessary to devise a rational resource pricing mechanism that is in line with the fundamental interest of society as a whole.
Legislation should be adopted to back up the establishment of a comprehensive capping system for resource use and pollutant discharge. Control of the maximum quantity of resource use and waste release would be essential to the success of our environmental target.
If any enterprises exceed the caps, the State should be entitled to intervene and mete out punishment.
Meanwhile, it remains necessary to bring out the role of administrative force in reining in excessive investment.
For example, the investment-stabilizing role of government officials at all levels should be systemized. This may be the best way to stem investment within the short term.
If the role of keeping investment stable were included into the career appraisal framework for government officials, given China's political realities, they would more actively seek out ways to cool down irrational investment.
Meanwhile, an effective official accountability system must be established to smooth policy implementation.
It is noted that in the August 2 document on clearing out newly started construction projects, which was issued by five central ministries, clear legal evidence is cited to back up the administrative action. This shows the central government is being more legally conscious in carrying out its policies.
In this way, it will be easier for the government policies to be seriously implemented.
The author Hu Shaowei is a senior economist from the Economic Forecasting Department of the State Information Centre.