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China is making efforts to cool down overheating of the national economy. The central government's latest measures include restraining investment in the iron and steel industry and raising bank reserve ratios. However, experts say the key to solving this problem lies in the property market.
Since last year, the overheating problem has been the focal concern of both the government and Chinese society.
The unceasing investment in industries such as steel, cement and aluminum has led to over supply in sectors such as power, oil and transport, causing price hikes.
China has just raised the price of gasoline. And the price of alumina has surged 80 percent since 2002.
To curb the fast price increase, which may cause a comprehensive inflation, the central government has taken a series of measures.
The central bank has again increased bank reserve ratios to restrain credit loans. And the central government has also issued administrative orders to cease the local government's construction plan of new steel, cement and aluminum plants.
But the results are not enough.
In the first two months of this year, investment in steel soared more than 170 percent. And steel plants under construction will be able to produce 330 million tons annually next year. Domestic demand won't reach that level until 2010.
And in the aluminum business, production capacity will exceed 10 million tons, double market demand.
Why doesn't investment in these sectors slow down even when it appears that many products may be kept long in stock? Professor Yi Xianrong with the Institute of Financial Studies of the Chinese Academy of Social Sciences gives an answer.
"Even though the supply may exceed the demand, people still invest as long as they believe they can make immediate profits."
During the first two months of this year, the profits of the steel industry reached US$2 billion, surpassing the oil and auto industries to rank first.
Then what makes the steel industry so profitable? Yi Xiangrong says it's the booming real estate market.
According to Wang Xiaoguang with the State Development and Reform Commission, China's real estate market has been growing 30 percent annually over the past six years. And the demand of steel on this market makes up half the country's total.
In addition, Yi Xianrong says the surging property development also stirs up more bank loans, adding much to the overheated economy.
Therefore, he believes the source of overheating is the fast expansion of the real estate market, which is, to some extent, the result of speculation.
Yi Xiangrong concludes,
"The investment will definitely slump as long as the government dampens the heat on the property market."
(CRI April 14, 2004)
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