Investment Fever is Running Too High, Says China

A senior Chinese minister warned yesterday that the world's fastest growing economy is in danger of overheating as expansion outstrips power supplies, threatens production quality and raises the risk of oversupply.

In the first six months of the year, China sprinted forward at a blistering pace of 8.2%, but then concerns about the risks were tempered by Sars. With the Sars outbreak under control, policymakers have started to speak out about the rise in the economic temperature, pushed up by the explosive growth of small, low quality and poorly regulated steel, cement and car firms.

"If it is not cooled, the investment fever in some industries will heavily affect China's robust economic growth," said Ma Kai, the national development minister, in a China Daily interview.

China's belated but passionate embrace of capitalism has produced enviable statistics, and because of its cheap labour it has become the workshop of the world. China was shocked by the scenes last week at French retail group Carrefour's new store in Hangzhou, in the eastern Zhejiang province, where sales assistants had to hold back shoppers (pictured). In the first half of the year, investment in the steel industry more than doubled. In June, car production surged 82% year on year, bank loans rose by 26% and fixed capital expenditure by 31%.

But the authorities are concerned that much of the new money is being thrown at in efficient firms and redundant capacity. This is worryingly reminiscent of the "great leap forward", when even remote villages established steel mills, raising national production, although quality was often poor.

The minister pointed out that many new steel and car firms use old equipment that worsens pollution and wastes energy. The power industry is stretched to the limit, as blackouts this summer have proved.

Financial authorities have also warned of a real estate bubble as investment in new housing outstrips demand. One result of this has been deflation, now at about 0.2%. Investment in excess buildings and factories is being fuelled by a sharp growth in the money supply, with cash in circulation 20% up in June. Last year, lending for property rose by more than 50%. The government has frozen land leases and warned local authorities to be cautious in infrastructure projects.