If soaring prices will give no relief to China's policy-makers, the third quarter growth should alleviate fears over a possible early credit squeeze which might have bitten too deep into the economy.

The National Bureau of Statistics is to release quarterly economic figures soon. Yet, the amount of tax revenue the country has collected so far this year, as announced by the State Administration of Taxation on Tuesday, already demonstrates a robust gross domestic product (GDP) growth in the past quarter.

China's tax revenue grew year-on-year 26.3 percent to 1.93 trillion yuan (US$232 billion) during the January-September period.

That growth slowed slightly from 26.9 percent in the second quarter to 25.8 percent in the third, due to government's measures to check investment boom.

But such a dip was more of a blessing than a cause for concern, because it mainly resulted from an expected slowdown in the growth of value-added tax collected from overheating sectors such as steel and the building materials industry.

Slightly slowed tax revenue growth was evidence that the government's macroeconomic controls have worked well in reining fixed asset investment and industrial output while not undermining the overall growth momentum.

At a glance, the Chinese economy is performing near perfectly, from an economic perspective, with rapid growth and moderate inflation.

However, closer examination indicates that the country's policy-makers are faced with multiple challenges as domestic prices conspicuously climb and revaluation pressure still lurks on the horizon.

In addition to worries concerning over-capacity in the future, one of the major reasons the Chinese authorities have been so resolute in applying tough measures to cool economic growth was inflation concerns.

Avoiding volatile economic fluctuations are what applies the huge brake on the country's economic growth. Many Chinese policy-makers remain haunted by the boom-bust cycle the country has experienced in the past two decades.

Unfortunately, for some of them, administrative means are deemed not only necessary, but also more effective than market tools in combating both inflation and deflation.

It is true that the central government has managed to act swiftly to curb excessive investment growth with all sorts of administrative means at its disposal.

But spiralling prices show that such an approach is not sufficient to address market problems that derive from a confluence of several factors.

China's consumer prices rose by 5.3 percent year-on-year in July and August.

Such an inflationary level in the third quarter appears a mixed blessing.

Since grain has taken the lead in the price hikes, farmers will benefit considerably. Falling grain prices had so seriously dampened farmers' enthusiasm to produce grain that an output shortage had loomed in recent years.

The bad news is that low-income families in urban areas found it more difficult to feed themselves.

In the spring, the People's Bank of China said it would raise interest rates if inflation exceeded 5 percent. But as of now, the central bank remains undecided in spite of the fact that real loan interest rates, taking into account rising prices, have already dropped to near zero. Not to mention the lower deposit interest rate.

There are growing calls for an interest rate hike. The ordinary men and women in the street need to ensure that their savings will not devalue amid inflation. For their part the government must not only bring inflation under control, but also prevent the public from seeking illegal investment channels.

Slowed savings growth in recent months bodes ill for both the long-term growth of the national economy, based on a high saving ratio, and the current financial stability built on limited non-State financing.

To ease anxieties over inflation, some experts recently predicted that consumer prices will ebb in the fourth quarter. But such a predication is untested, if not untenable.

It will be unwise for policy-makers to believe that international oil price rises will not soon filter through into the domestic market, especially as the country's currency is virtually pegged to the US dollar.

The country's foreign exchange regime has become a significant factor that affects the overall economic performance.

However, if the country's efforts to maintain currency stability are measured against the domestic troubles incurred, as some argued, they can hardly be called a success.

On the one hand, due to lingering speculation on renminbi revaluation, a huge inflow of foreign capital into China has forced the monetary authorities to pump out high-energy cash into the domestic market while tightening the credit window.

High-profile Chinese officials have had to repeat time and again the country's pledge to pursue a more flexible foreign exchange regime. As decisive action is delayed in the hope of choosing the optimum moment, international pressure for renminbi revaluation continues.

On the other hand, the current foreign exchange regime has placed China at a disadvantage as it increasingly shifts from a net export country to one with balanced imports and exports.

As a world manufacturing base, China has become a major importer of primary goods. Soaring prices of such items on the international market have not only resulted in the largest trade deficit China has suffered, but also affected the country's GDP growth.

It was estimated that price rises in the international oil market alone have cost China 0.77 percentage points of its GDP growth in 2000.

In the first four months of this year, China imported primary goods worth US$36.4 billion, up by 61.8 percent over the same period last year. As a result, the country's trade deficit over primary goods reached US$25.2 billion.

Clearly, if the current foreign exchange regime cannot be reformed accordingly, the country's terms of trade may not be able to make its expected contribution to further growth of the entire national economy.

Both interest rate adjustment and foreign exchange regime reforms are now on the table of China's policy-makers.

The ultimate goal of the ongoing macroeconomic management is to facilitate market-orientated industrial restructuring. To this end, first of all, the policy-makers should show their resolve to transform the economy into one that responds more smartly to market signals than to administrative decrees.

(China Daily October 15, 2004)