Abundant orders usually please business owners, but Liu Yuxiang's overflowing order book is instead a source of anxiety.

Liu's company, a small auto parts maker in Chongqing municipality, has been swamped with orders lately – more than it can fill. But Liu doesn't have the money to expand capacity so that his company can meet demand. "We'll be pushed out of the market soon if we can't fill the orders," he told CCTV.

Liu is not alone – at least not in Chongqing. About 80 percent of the municipality's small businesses have not had access to bank loans since the government tightened credit to prevent excess liquidity from pushing up prices, Sun Shenlin, chairman of the local industrial and commercial association, said.

The current round of macroeconomic regulation began last year to curb economic overheating and inflation, and recently shifted focus to inflation. It has resulted in a credit squeeze that's forced many businesses to the wall.

Policymakers plan to take a more flexible and targeted approach to avoid stifling other sectors. But economists say the policy should be flexible according to regions as well as the sectors.

China is a vast country with varied development levels, and economic cycles always move through the coastal region before they reach central and western areas, Zhang Baotong, deputy director of the academic committee of the Shaanxi Academy of Social Sciences, said.

For that reason, the economically backward western region should be treated differently when it comes to macroeconomic tightening, he said.

"Often when the eastern provinces have shown some signs of economic overheating, we western economies are just starting to pick up," Zhang said. "When the authorities notice the signs of overheating in the east, they take tightening measures, which dampen over-investment in the east but hurt normal development in the west."

This is reflected in the Chinese saying that macroeconomic regulation "cuts only the tail" of the eastern provinces but "beheads" the western region.

Lacking stimulus from consumption, the western provinces rely heavily on investment for economic growth. Key industries such as energy and resources, infrastructure, equipment, auto and shipbuilding, are all capital-intensive and linked with fixed-asset investment.

They lost out in previous macroeconomic regulation aimed at dampening investment. "Every time a new macroeconomic regulation is imposed, the gap between the eastern and western provinces widens," Zhang said.

"Across-the-board tightening would hurt the western economies, widening the regional development gap," Wei Houkai, director of the center for China's regional development at the Chinese Academy of Social Sciences, said. "It would have a different impact on regions with different economic development levels."

Annual fixed-asset investment growth was 22.4 percent in the eastern provinces in the first half of this year, compared with 19.9 percent last year – despite the macroeconomic regulation. In contrast, fixed-asset investment growth in the western region picked up only slightly to 28.6 percent in the first half from 28.2 percent last year.

The country's "western development drive", which began in 2000, has brought faster growth to the west, but tightened macroeconomic policies could compromise progress, Zhang said.

Policies are needed to help the western provinces catch up with the east, Zhang said.

(China Daily September 4, 2008)