Fan Gang: Overcapacity can easily bring losses to manufacturers through too many price wars. Banks will have to clear their bad corporate loans caused by such over investment. China now enjoys a good overall economy, and profits for enterprises are also on the rise. A study by the Brookings Institution, a private nonprofit organization that analyzes the current and emerging economic policy issues facing the United States and the world, concluded that over the past two decades, the total factor productivity (TFP) of China's manufacturing sector increased by 2.4 percent year on year. TFP is an indicator invented to measure overall productivity efficiency, including multiple-functions of technical progress, system transformation, profit increase or any other social and economic effect. Actually, China's economy boasts an overall TFP rise of 3.8-4.2 percent on average over the last 18 years, and this could explain China's current prosperity. In the context of adjustment, China maintains a comparatively low consumer commodity price against the price hikes of factors of production. The improvement of its economy should be largely attributed to the high performance of these corporate entities.

Trade surplus

Chinese policymakers are committed to curbing the excessive trade surplus. An actual increase of fixed assets investment in the first quarter of 2007 slowed down to 23.7 percent from 30-40 percent of last year, 4 percentage points lower than the corresponding period of 2006, indicates a shrinking domestic market demand.

On the other hand, the trade surplus also contributes to China's economic boom. Calculated on the Q1 figure, China's current account is very likely to climb to 10 percent of its total gross domestic product (GDP) by the end of the year. Economically, the trade surplus is equivalent to the savings surplus. It is universally agreed that China's consumption level is low and continuously declining in its proportion to GDP, reaching 40 percent, while saving deposits have risen to 50 percent. China is a populous nation with a lower per-capita GDP, and the majority of consumers have not much money to spend. Instead, the major source of these savings is from net income of Chinese companies, particularly from their undistributed profits. Currently, state-owned enterprises (SOEs) still adopt a preferential policy for loss makers, under which profits are totally kept by SOEs themselves. After the implementation of a unified income tax, Chinese enterprises will pay a 25 percent income tax, reduced from the previous 35 percent. Resources or energy suppliers do not even pay taxes, or concessionary costs. Although energy products are pricing much higher than before, the profits generated are still owned by these enterprises.

Until now, total corporate savings hold almost an equal stake with resident deposits. Of this, resident deposits account for 40 percent, government's reserve is about 10 percent, and corporate savings has surged up to 40 percent from previous 20 percent.

Adjustments of interest rates to boost consumption cannot fundamentally bridge the yawning trade surplus gap between China and the United States, and we need a consultation mechanism to address the disputes through bilateral efforts. And of course, China will deepen its reforms in the financial sector to guarantee a stable and balanced economic landscape.

Justin Yifu Lin: Investment has been a driving force in China's economic growth since 2003 with an increase of 27.7, 26.6, and 25.8 percent, respectively, until 2005. And it today holds 40 percent of the total volume of national gross domestic product. An investment rise can usually pull price indices up, and indeed prices for building material, energy and resources have been going up; but it has not caused much inflation in other sectors mainly due to a deflation stemming from overcapacity since 1998.

Rapid economic growth might not be absolutely harmful for a developing economy, and what has concerned the Chinese Government the most is that huge investment increase always centered on a few industries, for example, automobile manufacturing, real estate and building material sectors in 2002-03 and chemical industry in 2005-06. It perhaps could further worsen the situation of overcapacity after the investment was transformed into productivity and therefore poses a big risk to the sound growth of China's economy. In response, the government should promote its macro control policies to optimize the investment portfolio.

Some economists suggest a frequent raising of the interest rates to curb over investment, however, it could be a double-edged sword. To raise interest rates could also discourage consumption and make it harder to digest oversupply in the market. If we only raise the lending rate, it might not affect consumption but will inevitably widen differences between lending and deposit rates. Thus commercial banks would like to lend more and that will also boost investment. More importantly, since more than 80 percent of corporate investment in China come from bank loans, the interest leverage won't offer much help. As far as the above reasons are concerned, the Chinese Government has to depend simultaneously on the market, the law and administrative regulations.

This year opened with a 11.1 percent GDP growth in the first quarter, but maintained a low inflation rate and stabilized the consumer price index at 2.7 and retail price index at 2.1, respectively. It is noticeable that the government has dramatically reduced administrative regulations as overcapacity tensions are eased. Interest rate adjustments have become a more effective tool, especially after the listing of major state-owned commercial banks. A more rigorous lending condition requires an increase of company capital in investment, and makes these enterprises more sensitive to such adjustments.