China witnessed remarkable economic growth in 2003.

The world used to be sceptical about China's dramatic growth figures, but most nations now regard China as a driving force in the economy of many parts of the globe. Even the outbreak of SARS (severe acute respiratory syndrome) in the spring did not destroy the momentum, thanks to the determined efforts of the whole nation.

This year, concerns are arising that there is evidence suggesting that the Chinese economy is showing signs of over-heating.

The actual increase of investment in 2003 was 30 per cent, the highest since 1979. As a result, major production materials, such as coal, iron and steel and cement, as well as electricity, have been either in short supply or began to see price rises in the latter half of the year.

However, the breakneck pace of investment growth only happened in certain parts of the economy, such as real estate and automobile production, and it is those areas that have been driving up the prices of production materials.

By contrast, most consumer goods saw price declines up to the end of November. In other words, except for the manufacturers of construction materials and some agricultural products, major sections of the national economy have been over-producing, bringing about a drop in prices.

That is to say, although part of the Chinese economy is overheated, the rest is still troubled by excess production capacity, which began developing as early as 1998.

China's economy has now entered a new boom cycle. The latest downturn was in 2001, but the year of 2002 saw a strong upward turn.

It is good for China to see a long period during which the economy grows in a sustainable way with a steady tempo rather than leaping forward in a short time. This will allow the country to tackle problems occurring along the way with ease and to adjust policies as needed.

The prospects for achieving this are very good, judging from China's current situation and its long-term potential.

However, if the ongoing overheating in investment is not curbed in time, the country will probably be stricken by deflation in one or two years. The reason is that the investment will create more production capacity when there is already too much.

For the Chinese economy at this moment, deflation is a real threat, although it can handle an inflation rate of 5 to 6 per cent.

To make things worse, the heated investment growth has been accompanied by a steep expansion of bank loans, which is similar to the investment fever we used to see.

As we all know, bank loans were projected to grow by 15.2 per cent in 2003, but the actual growth rate was more than 21 per cent, far beyond the predicted figure.

The danger is that the investment growth is not backed by real demand.

Instead, a considerable amount of the investment is in the form of bank loans. Banks are eager to make loans with their huge deposit balances.

When the economy advances at high speed, bottlenecks, like short supply of iron and electricity, will emerge.

Under such conditions, the current growth is not sustainable in the long run.

Economic bubbles are inevitable in any fast-growing economy. When the bubble bursts, some countries sink into financial or monetary crises, but some do not.

We should try to keep the bubbles as small as possible.

One of the successful examples in this regard can be found in the United States. If the Federal Reserve of the United States had not raised interest rates when it did, the bubble in information technology might have been much larger than when it burst.

The government should not intervene in the everyday operation activity of banks or enterprises, but rather keep overall control.

From the perspective of monetary policy, the measures to supervise and administrate banks should be adjusted.

If the banks are prudent in making loans, investment fever will be cooled to some extent.

With production capacity still too high as a whole and overall demand relatively low, to maintain economic growth the government would have to continue its current pro-active fiscal policy.

The State should invest more in projects related to the improvement of production and people's life in rural areas to increase the efficiency of the policy.

Also, measures should be taken to impose strict supervision on such investments. The measures should be tailored to fit different sectors, especially in the financial sector.

In this way, we can develop a market economy that is well-ordered and highly efficient.

If macro control policies are put in place as needed, it will be possible for the country's economy to grow by more than 8 per cent in 2004.

(China Daily 01/16/2004 page6)