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Chinese Economy Going Against the Trend

While many countries are trying to pull out of a global recession, China is worried its economy is overheating. The People's Bank of China is ordering financial institutions to reserve more capital and rein in lending.

Investment in assets such as factories and buildings has grown by almost 33 percent in the first seven months of 2003. The first half of the year also saw money supply increase by more than 20 percent.

Economists say the central government fears that all this money in the banking system could lead banks to lend too freely, which could fuel inflation. Borrowers would be tempted to build more factories, office buildings and homes than the country needs. That oversupply eventually could cause some industrial sectors to collapse, and borrowers would not be able to repay their loans.

"It's the first time they are taking serious action, the first time they are taking a sizable amount of money away from banks," says Andy Xie, an economist in Hong Kong with Morgan Stanley investment bank. In a statement on its Web site Saturday, the People's Bank of China said too much money had been pouring into China in hope the country's currency would be allowed to appreciate.

Now commercial banks will be required to increase their reserves from six to seven percent - which means they will have less to lend, cutting the flow of money into the economy. According to official figures China's banks have lent $228 billion in the first seven months of 2003 - which is more than they did in the whole of 2002.

Mr. Xie says that while Saturday's move signals a change in policy, it is unlikely to slow things down immediately, which could send the whole economy into recession.

He says China's central government worries most about increasing unemployment, and any moves to slow growth will be carried out incrementally. One problem for China is that although many urban areas, especially on the coast, have booming economies, much of the country's interior is impoverished, and there are tens of millions of unemployed workers.

"China is a very large country. The overheating we're talking about is limited to some areas," says Mr. Xie. "But the problem is that most of the country is not growing sufficiently, unemployment is still very high."

Mr. Xie expects more moves in coming months to slow growth in China's property sector - where over-investment is particularly acute. He says China will likely resort to "administrative mechanisms" such as limiting the number of approved construction projects.

In the early 1990's, Beijing successfully took similar moves to curb growth. The Communist Party leadership is wary of letting inflation get out of control, which it fears could stir public discontent and lead to instability.