Market forces a better choice for soft landing
By Xin Bei (China Daily)
Updated: 2004-06-15 14:11

Latest statistics show the central authorities' tough measures to rein in excessive investment growth are working.

But to create a soft landing while maintaining the vitality of the national economy, the authorities need to better utilize market forces when making macroeconomic adjustments.

The country's industrial growth, though still high, dipped by 1.6 percentage points over the previous month to 17.5 per cent in May.

Yet, the more telling story is the drastic slowdown of fixed investment growth.

In the first quarter of this year, the country's fixed investment rocketed by 47.8 per cent over the same period last year. Such a huge growth rate spurred policy-makers into aggressive action against the frenzy of investment, particularly in several "overheated" industries like the steel sector.

Now, the monthly growth of fixed investment has been reduced to 18.3 per cent, bringing down the aggregate growth in the first five months to 34.8 per cent.

Undoubtedly, the swift and timely control of the steaming investment growth - the country's most important growth engine which risks bursting - justifies those tough measures including some administrative intervention.

However, administrative measures can only hold back zealous investors for a while. It will not persuade them to give up the projects that they consider profitable.

Market tools like interest rates can be used to redefine the profitability of those projects temporarily favoured by eager investors. A flexible interest rate regime can be used to discourage a large number of business people from rashly jumping onto the investment bandwagon.

China's consumer prices rose by a seven-year high of 4.4 per cent year-on-year last month.

It is high time that the central bank turned to the key instrument in its toolbox.

In the past, there were fears that the enlarged interest rate gap resulting from China's interest rate hikes would attract more foreign capital, fuelling revaluation speculation about the Chinese currency as well as further increasing the country's superfluous money supply.

But as the US Federal Reserve voiced its intention recently to raise interest rates faster than many investors expected, China's central bank needs to act in a more resolute manner.

No matter how small the margin, the renminbi interest rate hike will drive home the message that the days of "cheap money" are over - and the feverish investment will subside.

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