18 July, 2006

But the flurry of construction in Changsha, a southern Chinese city astride a cocoa-coloured river that until recently was far removed from the industrial bustle of affluent coastal areas, is typical of the building frenzy that has Beijing's economic planners worried.

Banks, companies and local officials are pouring money into building luxury housing, shopping malls, showcase government buildings and factories, helping to push the rocketing Chinese economy to a better than 10 per cent growth rate. More than two months after sounding the alarm about overheating, Beijing is having trouble slowing the pace.

"Chinese authorities are now scrambling to regain control over a runaway economy," Morgan Stanley economist Stephen Roach wrote in a recent report. "China needs a more serious policy tightening."

Construction projects like the forests of cranes on Changsha's horizon are just the most visible evidence of a China-wide investment binge that raised new spending on construction and factory equipment to $318 billion US by the end of May, up 30 per cent over the same period of 2005.

Such investments are forecast to exceed $1.3 trillion this year, nearly half of China's GDP.

To finance that spending, China's big commercial banks, their already fat cash balances swollen by government bailouts and recent multibillion-dollar initial public offerings, issued new loans worth $267.5 billion in the first half of this year.

The worry is that too much of the money is going into redundant or ultimately unprofitable investments, risking a rebound in bad loans and possibly a financial crisis. With China now an engine in the global economy and international investors joining in on the Chinese investment binge, a hard-landing could jolt world markets.

Apart from the risks in the real estate market, economists note surging manufacturing capacity in already glutted industries.

China's auto industry has enough capacity to make eight million units a year, far above the 5.7 million in sales in 2005. Supplies of about 70 per cent of all consumer goods exceed demand, according to the Ministry of Commerce - factors that contributed to a tripling in China's exports over the past five years.

Changsha, a city of six million, spent $300 million on construction in the first five months of this year, more than double the amount spent in the same period of 2005.

"Investment is overheating. There's no doubt about that," said Qu Hongbin, an economist for HSBC Corp. in Hong Kong. "It's not only the scale but the quality or efficiency that we are worried about this time around."

Warning that growth shows scant signs of subsiding from the 10.3 per cent rate seen in January-May, the government is attempting once more to clamp down on excess investment.

In its latest wakeup call, China's main planning agency issued a plea for more aggressive action to tighten credit and curb investment in real estate and factories, suggesting that the government levy a special tax on such spending.

The government has vowed anew to strictly control medium-and long-term loans and limit land use permits.

To help curb rising property prices, the government also ordered higher minimum down payments for mortgages, raised taxes on real estate deals and issued policies meant to force developers to build more affordable housing.

Meanwhile, officials are drafting new regulations that might limit foreign investments in the real estate sector, nearly all of which go into luxury housing, top-class hotels and commercial complexes.

Officials at the Commerce Ministry's foreign capital department, who refused to give their names, said they were working on a new policy for such investments but would not give any details.

So far, it's unclear whether the regulators can manage to override the local resistance and corruption that have undermined earlier tightening measures. A slew of recent lending scandals at top state-owned banks suggests that bank managers still often disregard newly implemented risk controls, bowing to political pressure to bankroll local projects.

That will mean more bad debts down the line.

In Changsha, the capital of Hunan province, the governor insists the building boom is mostly under control.

"We should admit that in some areas we do have problems," Governor Zhou Bohua said in a recent news conference.

He said overheated industries such as steel, aluminum and cement are being reined in by restricting credit and land allotments, adding that "in general, there is no market here for expensive houses."

Originally posted on CBC.ca