Yi Xianrong
Judging from the figures released recently by the National
Bureau of Statistics, the Chinese economy is faring pretty well,
enjoying high growth and low inflation.
The rate of fixed-asset investment, in particular, dropped to 24
percent at the end of last year from 30 percent in the first
quarter. This lets economists heave a sigh of relief.
However, the effects of the current round of macroeconomic
readjustments could be short-lived, since the effects were achieved
largely by heavy government-command measures.
So, investment in fixed assets could shoot up again once the
general economic climate changes. In this scenario, another
investment craze could be triggered.
A number of factors help explain the possible rebound of
investment in fixed assets.
First, the economic growth in recent years has largely been
powered by the rapid growth of investment in real estate that is
part of the accelerating urbanization.
Although the macroeconomic readjustment and regulation
implemented in the real estate sector have somewhat slowed the
runaway expansion of that market, no substantial effects have been
seen. This is because housing prices keep rising and the real
estate sector serves to boost the short-term growth of the gross
domestic product (GDP).
This is also because real estate involves very complex relations
between different vested interests.
All this is compounded by the fact that many of the government's
readjustment measures are largely of the command type.
In my visits to a number of medium-sized cities over the last
couple of years, I found that their real estate markets had
expanded enormously since 2005, when macroeconomic readjustment in
the real estate sector was launched.
Real estate developers have taken advantage of the differences
in the macroeconomic readjustment policy applicable in different
localities.
The real estate investment in some cities in western and central
China is increasing at the rate of 30 percent.
In mega-cities such as Beijing and Shanghai, the proportion of
real estate investment in the total fixed-assets investment and its
rate of increase were not reduced. Taking into consideration the
fact that the real estate industry is connected to more than 50
industries and sectors, a new round of investment fever could come
any moment if no effective control is put on the growth of real
estate investment.
Second, the surplus of capital within the country's banking
system also poses a barrier to macroeconomic readjustment.
This kind of capital surplus directly stems from the sharp
increase in capital resulting from the major banks' stock market
listings one after another.
Between October 27, 2005, and October 27, 2006, China
Construction Bank, Bank of China and the Industrial and Commercial
Bank of China raised nearly 360 billion yuan (US$45 billion)
shortly after they were listed on the Chinese mainland and Hong
Kong stock markets.
In addition, the three banks already had US$60 billion in
registered capital before they were listed.
There exists an enormous pool of capital that can turn into
loans. As a result, banks are expanding the scale of loans.
The banks hold an enormous amount of capital, which needs an
outlet. And they can reap easy profits by simply lending out the
capital.
In addition, expansion of loans is not only the primary means to
make profits for domestic commercial banks. It is a good way to
steer clear of short-term risks as well.
For these reasons, domestic banks' increase in loans keeps
snowballing.
Encouraged by the three banks' successful initial public
offerings, smaller domestic banks are scrambling to be listed.
This, in turn, could lead to more bank loans.
Although the People's Bank of China, the central bank, has taken
measures to bring the increase in loans under control, the impulse
for boosting loans goes largely unchecked. This is an important
factor that could trigger the rebound of fixed-asset investment at
any moment.
In addition, the domestic stock market began a long-awaited boom
last year. As a result, large corporations rushed into the
exchanges to raise money. They succeeded in raising 240 billion
yuan (US$80 billion) before the end of 2006.
The big money could help set in motion a new round of investment
fever in China.
There are also other factors such as strong expectation that the
renminbi will appreciate, strong volatility in the monetary market
and the banks' low-interest rates. These factors contribute to the
possibility of even more investments.
The crux of the solution lies in the government's adopting
effective macroeconomic policies to bring down the expectations of
enterprises and individuals and, in turn, regulate their economic
conduct so that sharp fluctuations in our economic life can be
minimized.
The author is a researcher with the Institute of Finance and
Banking at the Chinese Academy of Social Sciences
(China Daily February 14, 2007)