China's banking regulator will launch an inspection into bank loans for calcium carbide and ferroalloy projects, as the sectors have been identified as having problems with serious construction duplication.

The China Banking Regulatory Commission's (CBRC) inspection, announced Wednesday, follows a circular this month from the State Council, China's cabinet, which ordered a consolidation within the two high-polluting and energy-consumption sectors.

They are among a few industries that the government is moving to cool down after a surge of investment driven by climbing prices. Steel, cement and aluminium are already believed to be over-invested.

"The reasons (for consolidating the calcium carbide and ferroalloy industries) are mainly their high energy consumption and serious pollution, as it really remains to be seen if there is a problem of over investment," said Feng Fei, deputy director-general of the Industrial Economics Research Department under the Development Research Center, a State Council think-tank.

"But the inspection will help contain the rapid investment growth in those sectors."

The CBRC said its inspection will cover the branches of the China Development Bank, a policy-oriented lender, the four State-owned commercial banks and joint-stock commercial banks in selected regions. It is expected to complete in mid-July.

Many calcium carbide and ferroalloy manufacturers have expanded capacity in recent years in pursuit of continually rising profits, prompting concerns about overcapacity.

The capacity of calcium carbide and ferroalloy is expected to reach 10 million tons and 15 million tons, respectively, next year, which analysts say is almost double the expected market demand.

A lot of the new plants are of an inferior quality and fail to meet State environmental standards.

In its circular, the State Council ordered local governments to shut down certain low-output plants, stop approving new projects and end favorable policies for the two sectors.

Duplicate construction has "not only resulted in a waste of resources and environmental pollution, but aggravated the power shortage," reads the circular.

Despite some tightening measures in the latter half of last year, China's fixed investment continued 2003's sizzling growth in the first four months of this year by surging by 42.8 percent, prompting the government to stage further policy initiatives last month, which included several controversial administrative measures.

The fast growth in fixed investment and lending, as well as accelerated prices especially for raw materials and energy, has also triggered worries about an overheated economy.

And although the growth in fixed investment slowed slightly in April, a further pickup in production prices reported Wednesday offered little sign of lessening inflationary pressure.

China's production prices rose 5 percent in April from a year ago as a deluge of investment in factories, roads and other fixed assets intensified competition for steel and other raw materials, the National Bureau of Statistics said Wednesday.

Some analysts have expressed concern about the government using administrative measures in an increasingly market-oriented economy, citing the operational risk and effectiveness of such measures. The measures included price controls in regions.

The CBRC's loan inspections are also an example of administrative measures, said Zhao Xijun, director of the Department of Finance at the Renmin University of China, although the total state ownership of some banks justifies its method as it needs to protect the interests of the State as the banks' backer.

Although such inspections can potentially be effective as the banks' chiefs are still selected by the government, they are also subject to the influence of growing market forces, he said, as many fixed investment projects are now funded by private capital instead of bank loans.

This year's frequent tightening actions, particularly the administrative measures which some say are too strong, have fuelled fears of an abrupt economic slowdown, but government officials have insisted that the 7 percent economic growth target - which compares to last year's 9.1 percent - is attainable.

(China Daily May 26, 2004)