The recent slowdown in fixed-asset investment growth has fed some analysts' views that the central government's policy to bridle the overheated economy has produced the desired effect.

Urban fixed-asset investment amounted to 398.9 billion yuan (US$48.2 billion) in April, up 34.7 percent year on year, but the growth rate was 8.8 percentage points lower than that in March.

But does the policy really work so quickly? Or are there other reasons for such wide fluctuations in this year's economic statistics?

In fact, the central bank began tightening the credit last September to tackle the symptoms of overheating which appeared in mid 2003. It seems the monetary policies worked in the fourth quarter last year as investment statistics slackened.

However, the real situation may differ from the publicized figures. Apart from statistical errors, local governments and enterprises may have juggled with numbers to cater to their need.

At the end of last year, some economic indices temporarily declined. The improved statistics at year-end may have been the result of enterprises' answering the central government's demand for reining over-investment. On the other hand, enterprises may have consciously slowed down their investment to set the stage for a spectacular growth in economic indices this year.

Under these circumstances, the robust investment growth in January and February and the slow-down in March and April are normal.

The surge in raw material prices since late last year is related both to the growth in market demand and to the depreciation of the US dollar, to which the Chinese yuan is pegged.

However, the dollar's rally over the past two months has also sparked a rise in the value of yuan and sent China's price indices to a higher level.

In the first quarter of this year, the consumer price index (CPI) increased by 2.8 percent over the year-earlier period. The CPI increased 3.8 percent year on year in April, hitting a 7-year high. The pressure of inflation and overheating is looming.

The symptoms of overheating are mainly a result of overheated investment or, to be specific, the mania in fixed-asset investment, real estate development and urbanization. They are also related to an extent with the fluctuations of the US dollar's exchange rates with other major international currencies.

Considering the price rise and growing demand for investment, it is too early to judge the effect of the government's adjustment policy only by April statistics.

We should refrain from rushing to a conclusion that the investment has become runaway, which will prod the government to release tightening policies. Nor should we believe the government's policies will have instant effects.

The first thing is to make sure whether or not the economy is really overheated, and what the cause is in order to find the right cure. Even so, it will still need a remedy for the sicknesses.

It is naive to cry "overheating" on one hand and expect immediate cure from the government on the other. Things are not so simple.

The essential question with China's economy is not whether the economy is overheated, but how to tap the potential demand, in that excessive supply persists.

According to a recent Ministry of Commerce investigation on 600 types of major commodities, some 462 are oversupplied, 138 enjoy an equilibrium of supply and demand, and none is short.

The insufficiency of intrinsic demand, if not cured, will remain the largest obstacle to China's economic development.

(China Daily June 3, 2004)