The central government may need to launch a new round of cooling-down initiatives after the third quarter's indicators, released over the past two weeks, have shown signs of a speedy pick-up and looming inflation.

Relatively mild interventions have left room for many unwanted phenomena to make a come-back, which is in turn likely to prompt the government to take new steps in fighting unhealthy economic factors, economists said. More of them are speculating that this will include an interest hike.

Loans in renminbi issued in September totaled 250 billion yuan (US$30 billion) compared to 116 billion yuan (US$14 billion) in August. M2, the broad growth rate measurement of money supply, also rose slightly from 13.6 percent at the end of August to 13.9 percent at the end of September.

Fixed assets investment growth stood at 27.7 percent year-on-year during the first three quarters, but the figure for September alone is 27.9 percent, indicating a pick-up in speed.

In fact, some key figures were already showing a return to previous high growth as early as August, when the producers' price index for manufactured goods increased to 6.8 percent from 6.4 percent in July and June. "If this trend continues, the economy will accelerate," said Tao Dong, chief China economist with Credit Suisse First Boston.

Tao said the resurgence of the overheating threat was partly because the central government, to ensure the delivery of priority projects, had eased some of its restrictive measures. Many local governments and enterprises took advantage of this and restarted projects that had been halted in May and June.

In addition, after the first months of cooling down, some local governments and local enterprises are again finding ways to circumvent the central government's measures to launch new projects. Tao said local authorities are always thirsty for investment, particularly because officials feel they need good growth figures in order to prove their competency.

To this end, an increasing number of firms are obtaining credits outside the official banking system, from private sources. In Wenzhou alone, Zhejiang Province, unofficial lending has been growing since the beginning of the year. In July, the amount totaled 670 billion yuan (US$81 billion), up 23 percent from the same month last year, according to a survey conducted by the People's Bank of China.

If this situation worsens, it will weaken the authorities' capabilities in making further adjustments, said Tao.

What is more important is that China's resources could not support the accelerated growth, pushing prices higher. The consumer price index (CPI) has been hovering around 5 percent since May. Economists agreed that the threat of inflation has not eased up and would not in the final quarter.

Oil prices are still high and manufacturing labor costs are rising. Grain prices are likely to stay at current levels despite bumper harvests. In addition, price growth of some raw materials such as steel and non-ferrous metals also started to accelerate in August.

The administrative measures that central government has been using were controversial, with critics saying they should try more market-based measures. But renowned economist Fan Gang said lots of investing parties are still not real market-based entities, so market-oriented instruments would not be effective on them.

Tao is with Fan, but stressed that it is not easy to break the local "iron triangle" of local government-local companies-local banks. They collaborate in investing activities and lots of central government policies simply cannot be implemented properly at local level.

Instead of relying on levels of local government the central government may need to send out special envoys, as it did in mid-1990s, to ensure its intentions are fully enacted, Tao said.

The central bank has been spearheading an effort to mix market-based measures in to more administrative ones. Since last year, it has raised reserve ratio for commercial banks and has issued hundreds of billions of bonds to mop up funds in the inter-bank market.

Only last week it drastically raised the number issued, which is seen as a response to the accelerated growth of loans and money supply. Normally, the central bank would issue several billion to 30 billion yuan (US$3.6 billion) worth in a week. Last week the issuance totaled 80 billion (US$9.6 billion).

However, the move did not have a notable influence on the interest rate on the inter-bank market. The repurchase rate, a bench rate for this market, fell instead of going up. This indicated that there is still much liquidity in the fund market.

The central bank still has options in dealing with the situation: it can continue to issue bills, raise the reserve ratio, or raise the interest rate, which could help attract the money back into the banking system.

(China Daily October 25, 2004)