China has called on its 31 provinces to rein in their economies, state media said Sunday, in a sign the central government has yet to persuade local bureaucrats that red-hot growth is bad.
Vice Premier Zeng Peiyan emphasised that investment in factories, residential buildings and other fixed assets must be cooled down, according to the Xinhua news agency.
"The central government has made explicit requirements on economic work in the second half," Zeng said during a recent trip to the south-western province of Yunnan.
"Fixed-asset investment should be put under tight control and more efforts made to lower energy consumption and improve environmental protection."
China's economy, the world's fourth largest, expanded by 10.9 percent year-on-year in the first six months of 2006, boosted by massive investment.
Significantly, Xinhua said 90 percent of all investment in the first half had been approved by governments at provincial level or below, reflecting different agendas in Beijing and elsewhere in the vast country.
Whereas the central government is concerned about macro-issues such as inflation and other symptoms of overheating, local governments prioritise growth because it means more jobs and less risk of social unrest.
Beijing may have awesome formal powers but its actual clout over decisions made hundreds of kilometers away is limited. In reality local officials are frequently calling the shots, according to observers.
"Local government dominance in Chinas economy appears the most important factor in Chinas macro-behaviour," Andy Xie, a Hong Kong-based economist at Morgan Stanley, said in a recent research note.
In the complex game between Beijing and the provinces, the provincial players have important tactical advantages, according to Xie.
"Local governments can create a fait accompli by starting numerous projects to deter macro-tightening by the central government, as cutting off liquidity would keep these projects unfinished," he said.
"Second, local government leaders often have a more senior rank than their regulators in the Communist Party hierarchy and, hence, have a major say in macro-policy."
The economies in three quarters of China's provinces expanded at 12 percent or more in the first six months, above the national figure of 10.9 percent, the country's key economic planner said in a report last week.
Prime Minister Wen Jiabao, at a teleconference with senior party and government officials at both the provincial and county level in late July, demanded obedience to Beijing's macroeconomic directives.
"All localities and departments must unify their thinking and bring it in line with the central government's assessment of the current economic trends," Wen said in remarks carried in the People's Daily on July 27.
It is testimony to the current importance of the provinces that local banks, often outside Beijing's direct supervision and control, have been able to continue lending to investment projects.
Commercial banks extended 2.34 trillion yuan (290 billion dollars) in the first seven months of the year, according to statistics from the People's Bank of China, or central bank.
This means the banks have already used up 94 percent of the total loan quota of 2.5 trillion yuan they have been given for the whole year.
CHINA WILL CURB FIXED-ASSET INVESTMENT:
Chinese Vice Premier Zeng Peiyan has urged local governments to rein in fixed-asset investment growth and reduce energy consumption as part of efforts to prevent the world's fourth-largest economy from overheating.
Overall fixed-asset investment expanded 31.3 percent in the first half of the year, sparking concerns among top officials and economists that the economy might overheat.
"Fixed assets investment should be in tight control and more efforts be made to lower energy consumption and improve environmental protection," the Xinhua news agency on Sunday quoted Zeng as saying during a recent inspection tour of the south-western province of Yunnan.
Fixed-asset investment growth in the first half has prompted the government to raise interest rates, increase banks' required reserves and order an audit of new investment projects.
The National Development and Reform Commission (NDRC) has fired a series of warnings recently about the need to slow investment, a root cause of overcapacity in some sectors that is raising fears of a boom-and-bust cycle that could trigger bankruptcies and new bad loans.
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