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China Takes Steps to Slow Down 'Economic Overheating' - 2004-05-01

China is taking steps to slow down what its leaders and some economists believe is the overheating of its economy. The news has affected stock markets all over Asia and as far away as Europe.

The government news agency, Xinhua, on Friday said the State Council - China's cabinet -ordered a large-scale examination of construction projects where the government believes too much money has been invested.

Property developments under scrutiny include office buildings and housing, where state-owned banks have poured in loans.

The measure is the latest the government has taken to try and slow down and stabilize China's economy, which many economists and analysts believe is growing too fast.

Stephen Roach, chief economist at Morgan Stanley, spoke to reporters in Beijing recently. Rapidly growing economies sometimes run the risk of too much bank lending, which companies cannot repay. Mr. Roach says this might have happened in China's construction industry.

"The problem is excess bank lending and excess investment and they're going to use the tools they have at their disposal, largely monetary policy tools, to slow down bank lending," he said.

Chinese officials this week instructed some of China's big commercial banks not to rush through new loans before a weeklong national holiday, which begins Saturday.

Jim Walker, chief economist at Credit Lyonnais Securities Asia, believes that this kind of government-led economic engineering is bad for China, whose leaders say they need 14 million new jobs this year. He says China's emerging private sector and other areas of government investing would offset any trouble.

"They have a private sector, which is no longer being contained by government policy," said Jim Walker. "There are other areas where the government is encouraging investments; those other areas I think usually offset the ones where there's worry about investments."

Some economists say China's situation is similar to one 10 years ago, when there was a surge in investment and inflation topped 20 percent. Morgan Stanley's Stephen Roach says China's leaders managed that situation and he is confident they can manage this one.

"I'm really confident that the leadership is on top of this and they're moving to preempt the dynamic that - if left unchecked - could have produced a hard landing," said Stephen Roach. "I think China will have a soft landing."

This time around, Mr. Roach says conditions are less dire with, among other things, a low inflation rate of about three percent.

Chinese officials this week instructed some of China's big banks not to rush out new loans before a weeklong holiday, which begins Saturday. Analysts interpreted the move as a temporary moratorium on new lending, triggering stock declines all over Asia and as far away as Europe.

Analysts say investors are worried that a quick slowdown in China's huge construction sector would hurt stocks in related industries, such as steel and cement.

Mr. Roach warned other countries in Asia whose economies depend on China's growth to find ways to deal with a possible slowdown.