China needs to rein in "blind" investment and construction, President Hu Jintao said on Saturday, reiterating vows to curb over-investment to avoid derailing growth in the world's sixth-biggest economy.
Hu said the government would employ legal, economic and administrative means to contain a serious threat to an economy whose insatiable appetite has helped Asia through the past year.
Though short on specifics, economists said Hu's call showed how serious the problem was and would be a sharp reminder to local governments to focus on investment returns.
"China's been facing these 'new problems' since the 1980s," said China People's University economist Xu Rong.
"The key problem is that a great part of the investment is not from private investors but local governments, which has led to blind investment and repetitive construction from officials unconcerned about investment returns in the longer term."
China's economy expanded 9.7 percent in the year through the first quarter on the back of a 43 percent jump in fixed asset investment, despite the government's moves to tighten credit.
And that is probably understating the problem. Economists reckon the economy grew at annualised rates of more than 15 percent between the last two quarters - significantly higher than an official seven percent target that is seen as more sustainable.
"We are soberly aware that there are also some new problems in the Chinese economic operation, which are mainly manifested in the following: excessive growth in fixed asset investment and the quite serious problem of blind investment and repetitive construction at a low level," Hu said.
"As a result, we have seen a short supply in coal, electricity, oil and transportation as well as excessive growth in monetary credit," he told the Boao Forum for Asia in a question and answer session.
"Although these issues have arisen in the process of China's development, however, they would bring negative impact on the sound development of the Chinese economy if they are not dealt with in a timely fashion," he said.
Central banks usually control economic growth with monetary policy - adjusting the amount of money that banks have available for loans, which raises or lowers interest rates and sometimes exchange rates.
But China faces "limited room for manoeuvre and few policy tools", the Beijing Unirule Institute of Economics, an independent think-tank, said in a research report.
The central bank has raised bank reserve ratios three times in the past seven months, forcing banks to keep more cash on hand instead of lending it out.
China has also slapped bans on new projects such as aluminium smelters, and has named steel, cement, property and automobiles as other areas of concern.
But the steps taken so far have shown little sign of putting the brakes on economic growth, sparking speculation authorities may raise interest rates or adjust the currency down the line.
"To find a solution to these problems, the key still lies in deepened reform and improvement of the mechanism as well as adopting an integrated approach to ensure co-ordinated development," Hu said. "We will mainly rely on economic and legal means supplemented with necessary administrative means to strengthen financial control and credit management and to contain the excessive investment in certain industries".