Chinese macro-economic administrators are facing a tough test treading the thin line between effectively curbing investment mania and not hurting the stable growth of the entire economy.

The challenge is highlighted by the call from economic researchers for policies that sound extremely difficult to work out.

Yu Yongding, director of the Institute of World Economy and Politics at the Chinese Academy of Social Sciences, said the current economic situation requires the macro-economic control policy to be tilted towards prevention of overheating.

The researcher pointed to growing signs of an overheating economy, including an excessively fast rise in money supply, banking loans and fixed-asset investment.

Despite a slowdown caused by the sudden outbreak of SARS (severe acute respiratory syndrome), China's gross domestic product recorded a growth of 8.2 per cent in the first half year, compared with 7.1 per cent for 2002.

Fixed-asset investment posted a year-on-year increase of 32.4 per cent in the first eight months of this year to reach 2.23 trillion yuan (US$269.6 billion), the highest since 1994.

As of July, new loans by commercial banks had soared to 1.9 trillion yuan (US$228.8 billion), more than the 1.8 trillion yuan (US$223 billion) that they lent in all of 2002.

"The present investment fever will not necessarily lead to runaway inflation in China but it threatens to hurt economic efficiency, worsen the economic structure, cause oversupply and finally aggravate inflation," Yu said.

Zhang Guobao, deputy director of the State Development and Reform Commission, went as far as to warn that overheated investment in some industries, if not effectively cooled, could undermine overall economic development.

Government statistics show that industries ranging from property, iron and steel and automobile to aluminium are suffering from investment duplication, which may lead to ruinous overcapacity.

Urgent measures such as improving investment and loan structure and stimulating consumption are needed to fend off potential risks, according to Zhang.

But Xu Hongyuan, a senior researcher with the State Information Centre, argued that the government should be cautious not to slam the brakes on rapid economic growth just because of possible inflation in the future.

"In the short term, the Chinese economy needs to maintain fast growth to address long-standing problems characterized by soaring unemployment and poor utilization of capacity," Xu said.

"So policy-makers should not introduce inappropriate policies in order to stave off inflation that is likely to emerge in three to four years."

The researcher suggested disagreement with the central bank's move to whittle down money supply and tighten bank lending.

A deep worry about inflation has propelled the People's Bank of China to raise the reserve ratio required by commercial banks - the percentage of deposits that banks must hold as reserves - to reduce money in circulation.

Xu noted that the judgment about overheating should not be based only on the quick expansion in loans and investment.

"No government has ever taken just growth rate as the criteria for an overheated economy," he said.

The researcher stressed that none of the three indices for assessing the economic situation - inflation, price for fictitious property such as stocks and bonds and international payment balance - indicates an overheated economy.

For instance, the consumer price index, a key gauge of inflation, gained only a moderate 0.6 per cent in the first eight months.

Meanwhile, the Chinese stock market has been in a bear hug since June 2001 and the country has been maintaining a surplus on both current and capital accounts.

"Based on these indices, the Chinese economy is still on the verge of deflation and far from overheating," Xu said.

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