OPINION

Beware of Investment Bubbles

China's economic growth has slowed over the past six quarters. This has made "sustaining growth" top priority in the government's macro-control efforts.

In the short run, China's domestic consumption lags far behind expectations. Affected by the euro zone's debt crisis, China's exports have contributed little to economic growth. The Central Government has to pin its hopes on investment to maintain growth. This kind of macro-control mindset has ended up with the rebound of housing prices and soaring investment from local governments.

Some local governments have handed in their investment plans. The Changsha Municipal Government has formulated an investment plan worth 829.2 billion yuan ($130 billion), consisting of 195 projects. While the total fiscal revenue in the capital city of Hunan Province was only 66.81 billion yuan ($10.48 billion), which means the investmentplan will cost 10 years' fiscal revenue for the city. Guizhou Province has stipulated a development plan for its tourism industry. Covering 2,382 projects by May, the plan needs 3.25 trillion yuan ($509.6 billion) in investment while its fiscal revenue in 2011 was only 133 billion yuan ($20.85 billion).

Right now, excess investment has caused imbalanced economic development. More investment can only bring about better economic statistics in the short run, but is not helpful for solving problems in the real economy and the long-term development of small and micro-companies. Worse still, more investment will reduce the number of policies designed to solve those problems.

It has been well demonstrated in the past four years that loosening monetary polices, launching government-driven investment and simplifying approval procedures for major projects will accumulate risks instead of sustaining growth in the long run. It will trap China in a vicious circle of excess capacity. Except for the impact of the euro zone's debt crisis, economic slowdown in 2012 is the result of stimulus policies during the past two years, which postponed China's restructuring efforts and caused irrational boom of industries with excess capacity, such as cement and iron and steel sectors.

Economic slowdown for six consecutive quarters is definitely not a short-term phenomenon. It also wasn't caused by external factors, such as the debt crisis. The fundamental reason is a real turning point after three decades of economic growth, marking an end to the growth pattern depending on investment, exports, low-end manufacturing and real estate.

Real problems in the Chinese economy, such as overcapacity, the survival of small and micro-companies, monopoly and industrial upgrade, cannot be solved by another round of government-driven investment. They can't be solved by loosening monetary policies, either.

For the Chinese economy, what's more dangerous than a slowdown is local governments' exorbitant investment with the excuse of "sustaining growth." They will leave political performance to themselves and leave debts to banks and their successors. If we don't muster enough courage to tackle this, it will become a ticking time bomb threatening to destroy the Chinese economy.

This is an edited excerpt of an article by Ma Guangyuan, a renowned business commentator, published in National Business Daily

THE MARKETS

New Sub-branch

Bank of East Asia (China) Ltd., a fully owned subsidiary of Hong Kong-based Bank of East Asia (BEA), has opened a new sub-branch in Zhanjiang, Guangdong Province. The new outlet provides comprehensive yuan and foreign currency banking services.

It marks an important addition to the bank's branch network in south China, since the city of Zhanjiang, located in the southwestern part of the province, is a major port and trade center in south China.

The branch is also the eighth "cross-location" sub-branch established by BEA China in Guangdong under the liberalization measures of the Supplement VI to the Mainland and Hong Kong Closer Economic Partnership Arrangement.

BEA China operates 31 outlets in Guangdong.

Electronic Info Boom

Chinese electronic information enterprises on this year's top 100 list totaled 1.76 trillion yuan ($275.1 billion) in main business revenues. The figure, which accounts for 24 percent of the sector's total, showed an increase of 14.7 percent from that of the enterprises on the top 100 list last year, said Gao Sumei, an official of the Ministry of Industry and Information Technology (MIIT).

Among them, 34 enterprises saw their main business revenues exceed 10 billion yuan ($1.57 billion), up by seven from that of last year's top 100. Chinese electronics giant Huawei ranked first in terms of main business revenue, followed by Lenovo and Haier.

Total profits of these enterprises reached 88.4 billion yuan ($13.88 billion), taking up 27 percent of the sector's total. And 23 companies reported more than 1 billion yuan ($156.8 million) in profits.

NUMBERS

278.8 billion yuan

In the second quarter of 2012, the transaction value of China's online retail market (consisting of B2C and C2C) totaled 278.8 billion yuan ($43.72 billion), up 27.4 percent year on year.

76 %

The transaction value of Taobao surpassed 200 billion ($31.36 billion) in the second quarter of 2012, accounting for 76 percent of China's online retail market.

98.84 billion yuan

The transaction value of B2C market was 98.84 billion yuan ($15.5 billion), up 82 percent year on year.

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