The slowdown in fixed asset investment in the first five months and the resumed surplus of China's foreign trade indicate the central government's harsh measures to cool down the overheating economy have achieved some success while not adversely affecting the momentum of economic growth.

However, the figures also mean that capital - one of the most precious resources in China - remains flowing to low-yield sectors while the dynamic private sector of the Chinese economy is relatively financed by banks.

Earlier this month the National Bureau of Statistics (NBS) revealed fixed asset investment stood at 439 billion yuan (US$52.9 billion) in May, a year-on-year increase of 18.3 per cent but 16.4 percentage points lower than in April.

For the first five months, fixed asset investment rose by a year-on-year 34.8 per cent, also slowing from the 42.8 per cent growth for the first four months, NBS said.

Meanwhile, China's foreign trade swung to a surplus of US$2.1 billion in May after four consecutive months of deficit. Import growth in May slowed substantially compared to April.

May imports rose by 35.4 per cent to US$42.8 billion, down from April's 42.9 per cent rise.

The two sets of figures - fixed asset investment and foreign trade - are connected to each other.

It is the surge in fixed asset investment that has led to the dramatic increase in raw material imports, causing four months' trade deficits.

In the first three months, the fixed asset investment grew by 43 per cent year on year. Meanwhile, China's gross domestic product (GDP) increased by 9.7 per cent. At the same time, imports grew by 42.3 per cent over the same period from the previous year.

Government measures to cool down economic overheating led to a slowdown in imports of iron ore and steel, but these measures, including tightening bank lending policies and restrictive measures on massive investment projects, have not led to a slowdown in exports. Exports in May surged by 32.8 per cent to US$44.87 billion.

Export has long been a major stimulator of the Chinese economic growth, and the harsh macroeconomic adjustment policies seem not to have severely impacted export-oriented industries.

However, we cannot become too optimistic about the figures.

The much slighter impact the export-oriented industries receive during the current economic cooling down is partially because these industries do not absorb huge bank loans. The tightening lending policies do not hit these industries very hard.

But why have bank loans not been mainly channeled into the export-oriented industries? Some factors - which are all related to the less efficient economic structure of China - contribute to the situation.

The major reason is China's bank loans mainly go to State-owned enterprises (SOEs), which account for a relatively low percentage of export-oriented enterprises. That explains why China's export-oriented industries receive fewer bank loans.

Statistics from the Ministry of Commerce indicate that among China's total exports in 2003, products from foreign-invested firms and private enterprises accounted for about 65.7 per cent, with the remaining portion from State- and collectively-owned companies.

Most foreign investors' capital reserves are relatively sufficient and they at most need some short-term loans from Chinese commercial banks as working capital.

On the other hand, although most private exporters lack capital in China, it is very difficult for them to get bank loans.

As a result, many of these private manufacturers must rely on private channels to finance, sometimes through illegal usuries. The research of the Beijing-based Unirule Institute of Economics indicates about 80 per cent of private firms in China find it difficult to get bank loans.

But where have the bank loans gone?

According to the quarterly report of the People's Bank of China, the central bank, most commercial bank loans in the first quarter went to various fixed-asset investment projects - including steelmaking, automaking, real estate development and electrolyte aluminium - which require billions of yuan for one single factory.

Most of these projects are invested and operated by SOEs with sporadic exceptions by local government-backed private firms.

Due to blurred ownership which make no one really responsible for investment losses, many investment projects by the State-owned sector suffer losses and low efficiency.

Yet that fact has not prevented the government and SOEs from pouring money into profitable investment projects, particularly during a period of economic overheating which mirrors a false picture of strong demands.

The measures to cool down the economy do not change the structure of the Chinese economy. The State's financial supports remain flowing to the State-owned sector and private firms while public welfare progammes like education, medical insurance, rural development and workers' pensions are poorly financed.

To fundamentally solve the problem, the government should spend more money on public projects instead of SOEs and the dynamic private sectors should get more loans. The government should earmark more financial aid for renovating its technological level and improving competitiveness.

(China Daily June 25, 2004)