(1/9/2010)

Fueled by a massive stimulus package and bank credit, China's economy grew at an enviable pace last year given the world economy was in deep recession. For growth to keep increasing steadily, the government must focus on trimming industrial overcapacity and spurring consumer spending this year.

"Investment in industries with overcapacity and redundant infrastructure projects threatens the quality of the bank credit," said Zhou Xiaochuan, China's central bank governor in an interviewwith China Finance magazine on Jan. 3.

Government officials have repeatedly warned that the country's economic recovery could be hampered with chaotic expansion in certain sectors, notably in steel making, cement, coal, chemical and wind power equipment.

The number of industries at overcapacity increased from 11 in 2005 to 17 now, said Wang Jian, secretary general of China Society of Macroeconomics, in an article in the state-run magazine Liao Wang (Outlook).

During the interview, Zhou reiterated lenders should not give credit to producers running at overcapacity or polluters.

He noted some infrastructure projects when completed would have surplus capacity. "It may be too early to built new highways in some areas where traffic is very light. The highways would not be able to generate enough toll revenue to pay off the bank loans, although the investment would probably pay off in the long run," he said.

Zhou reaffirmed that banks should lend more to new energy projects and industries of strategic importance, as well as to some services such as job promotion.

Last year the Chinese government implemented a 4-trillion yuan (587 billion U.S. dollars) stimulus package and extended nearly 10trillion yuan of new loans in 2009 to counter the impact of a 20 percent drop, approximately, in exports caused by the global financial crisis.

The contingency measures produced immediate results as the quarterly economic growth escalated from 6.1 percent in the first quarter to 8.9 percent in the third.

However, imbalances exist in the economy that need to be addressed.

"Industrial overcapacity is a global issue, which is fundamentally the result of less demand and a shrinking market. In China, it was a result of the long-existing problem of an imbalanced economic structure," said Chinese Premier Wen Jiabao inan exclusive interview with Xinhua late last year.

As overcapacity has become an obvious problem, the government should apply strict standards regarding the approval of new projects in the manufacturing industries, the State Information Center (SIC), a government think-tank, said in a research paper published on Tuesday.

CONSUMPTION POTENTIAL

It is "fairly difficult" for China to maintain stable and fast economic growth this year, as exports, a driving force of the nation's GDP, are unlikely to return to the pre-crisis level any time soon, and the effects of the pro-consumption policy are gradually weakening, said Zhang Xiaoqiang, vice minister of the National Development and Reform Commission (NDRC), the economic planning agency on Tuesday.

Since external conditions would become more complicated in 2010,the government should not hesitate to speed up industrial restructuring, said Li Daokui, a professor of finance with Tsinghua University.

Realizing that consumer spending was crucial for achieving a sustainable economic recovery, the government last year provided subsidies to help farmers buy automobiles, home alliances and farming equipment.

Policy incentives helped China overtake the United States to become the world's No.1 auto market last year.

However, the SIC report pointed out more spending at present probably would result in less spending in the future.

"The rise in consumption would not continue if the government does not roll out more policy incentives," it said.

It predicted retail sales would grow 15.1 percent in 2010 taking into account inflation, about 1.8 percent lower than retail sales growth in 2009.

The report noted the auto market would be less active with the ending of favorable tax incentives on the purchase of automobiles with engines of up to 1.6 liters or less.

At the annual Central Conference on Rural Work which concluded on Dec. 28, the government promised to step up efforts to stimulate rural consumption, saying it was important to drive domestic demand by increasing rural consumption.

It also pledged to continue efforts to improve farmers' lives and rebalance income distribution generally.

The SIC report suggested the government should introduce polices to raise people's salary to 45 percent of GDP to allow consumers more room for spending.

That number fell from 51.4 percent in 2000 to 39.7 percent in 2007. In developed nations the figure is at least 50 percent.

It also advised the government to cut tax to keep more money inthe hands of consumers.

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