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Chinese Officials Concerned About Side Effects of Skyrocketing Economy - 2004-04-15

China's economy continued to expand at a blistering pace in the first quarter of this year, raising concerns that excessive growth could lead to inflation and other problems. The government's efforts to cool things down have met resistance.

Gross domestic product in China grew 9.7 percent in the first three months of this year, indicating the government is having trouble constraining growth. Government data issued Thursday also showed that inflation rose 2.8 percent.

China's official target for growth this year is 7 percent - down from last year's GDP surge of 9.1 percent. Chinese authorities are afraid that excessive growth will lead to inflation, shortages of commodities and electricity, risky bank lending and other problems.

Dong Tao, an economist in Hong Kong with the investment bank Credit Suisse First Boston, says central government officials in Beijing are worried about the growth rate, but are limited in what they can do.

"The government is clearly more concerned about inflation and overheating than ever before," he said. "But because the local governments still [are] very much keen to run the economy as much as possible, we're not really seeing as much slowdown as the government would hope."

Just a few days ago, the central government tried to brake the economy by raising the level of reserves banks must hold by half a percentage point. That means banks have less money to lend to businesses that want to expand their factories or develop real estate.

Many economists and business leaders in the region say provincial and city officials around China routinely ignore Beijing's efforts to limit new business deals.

China's central government must walk a fine line between slowing growth slightly, and avoiding actions that cause a sharp downturn. The country has tens of millions of unemployed workers and its banks are burdened with vast amounts of bad loans. Pushing growth too far below seven percent could worsen unemployment, and make it harder for borrowers to repay their debts.

On the other hand, if growth is not capped, it could lead to price inflation. Rapidly rising inflation in the past has caused considerable social unrest in China, and in 1989 contributed to mass demonstrations calling for reforms and democracy. The government ultimately called out the military to crush the demonstrators.