China to Sharply Cut Investment Growth

[HenryTo]

China to Sharply Cut
Investment Growth

Pullback in Expansion
Of Infrastructure May Have
Broad Knock-On Effect
By JAMES T. AREDDY and CHARLES HUTZLER
Staff Reporters of THE WALL STREET JOURNAL
March 7, 2005; Page A16

BEIJING -- Chinese Premier Wen Jiabao targeted a sharp pullback in China's investment growth this year, a trend that could hit a broad swath of the economy from tax collection to loan growth to personal incomes and imports.

A key problem in China's fast-growing economy has been overinvestment in buildings, factories, infrastructure and other fixed assets. In his annual work report to the national legislature this weekend, Mr. Wen said the government is targeting fixed-asset growth of 16%, still double the targeted growth rate for the overall economy but sharply lower than last year's fixed-asset growth of 26%.

The knock-on effect could be wide-ranging. Fixed-asset investment was equal to half of China's $1.65 trillion economic output last year. Mr. Wen forecast overall trade growth would fall by more than half, to 15% in volume terms from 36% in 2004, presumably because of a drop in imports and a slowdown in factory expansion. Urban wage-earners should expect paychecks to grow 6% this year, compared with 7.7% in 2004, he said.

The sharply reduced target for investment shows how concerned the government remains that the rapidly growing economy could spin out of control and how serious Beijing is about preventing that from happening. Beijing resorted to drastic measures last year -- a freeze on some bank lending and a ban on certain land sales -- to restrain the investment boom. Still, economic growth in 2004 was slightly higher than in 2003, in part because local governments, always keen for high growth, circumvented controls.

Yet a sudden crunch could prove just as worrisome, derailing the growth that the government relies on to create jobs and that has helped fuel a global boom in commodity prices in the past few years.

The annual session of the Communist Party-controlled National People's Congress is a crucial opportunity for the Chinese leadership to drive home policy priorities to provincial and local politicians and bureaucrats, who comprise most of the congress's nearly 3,000 delegates. In addition to approving the government's economic plans for this year, the congress's most important agenda item is passing a law against secession, a measure aimed at keeping Taiwan from formalizing its de facto independence. Underscoring Beijing's determination, the budget this year includes a 12.6% increase in military spending to further an ambitious modernization of the People's Liberation Army.

Mr. Wen didn't unveil any new policies on the yuan in his report to the congress Saturday. The U.S. and other trading partners with China have urged Beijing to allow the yuan to strengthen against other currencies, a move it has resisted. But even a small upward revaluation of the Chinese currency could help in Beijing's efforts to cool the economy, by making exports more expensive and reducing an influx of speculative investment that has surged into China -- the property market in particular -- in expectation of such a revaluation. Some Chinese economists say now is the time to revalue the currency.

"China's government has seriously considered the possibility of yuan revaluation, and the conditions are ripe for a revaluation," said He Fan, a researcher at the Chinese Academy of Social Sciences' Institute of World Economics and Politics.

In the past two weeks, China's state media has prominently quoted the chief currency regulator, Guo Shuqing, discussing plans for a "floating range" for the yuan. On Saturday, the state-run China Securities Journal quoted Mr. Guo, head of the State Administration of Foreign Exchange, as saying that the country already has made preparations to overhaul the exchange-rate system, which currently keeps the yuan in a very narrow range around 8.28 to the dollar.

Chinese economists have advocated that regulators gradually increase the ceiling and floor of the band within which the yuan is permitted to trade. Any changes to the band would likely take place gradually. Many economists believe that if the trading band is widened, the yuan most likely would bounce quickly to the top of the newly set ceiling.

With the expected slowdown in the economy, Beijing said it doesn't trust last year's bumper year for tax collection to continue, and will allow funds to narrow the budget deficit to 2% of GDP this year rather than push forward tax cuts or other relief. This year's expenditure is expected to total $237 billion, up 7.6% over 2004, compared with a 10.5% rise in expected revenue.

But the government isn't so much turning off the taps of state spending as redirecting the flow of funds to spread the benefits of growth more widely. Mr. Wen in his report announced increases in spending to help the unemployed, the poor and farmers, including a 25% boost in subsidies to $8 billion to abolish agricultural taxes nationwide by next year. More government money also will be allocated to build up pension, medical and unemployment-insurance programs.

This shifting of resources underscores the government's concern that widening income inequalities are feeding social discontent, a problem Mr. Wen noted in his speech. But the move, economists said, also makes good economic sense in the long run. Income growth in rural China, where most of the population lives, has lagged behind that of the cities. That has produced a drag on domestic consumption, which has remained a weak engine in economic growth, especially compared with the hot real-estate and export sectors.

China's actual growth routinely has surpassed government targets in recent years. But part of the message conveyed by Mr. Wen and China's other top economic policy makers is aimed at putting government officials on notice that overall economic control should be "routine," said Yi Xianrong, a researcher with the Financial Institute of the Chinese Academy of Social Sciences. He said the government wants to reduce the need for the kind of activity used last year to cool the sizzling economy, including "emergency policies coming out after seeing something going wrong."

In a report handed out to legislators over the weekend, the National Development and Reform Commission, warned that "the economic system is unsound, the economic structure is irrational and the pattern of economic growth is too crude. We all need to adopt proactive measures to solve these problems."

Beijing is aware its policy pronouncements go only so far. Though President Hu Jintao last July personally delivered a message to top officials in Shanghai that the city should focus on quality growth, signs of a property bubble have persisted. Just days before the national legislature session opened, Shanghai media reported that demand to buy units in Gold Bund Garden, a new apartment complex in downtown Shanghai, prompted a scramble for application forms that lasted 12 hours.

---- Cui Rong contributed to this article.

Write to James T. Areddy at james.areddy@dowjones.com1 and Charles Hutzler at charles.hutzler@wsj.com2

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