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Beijing asks local governments to tackle runaway investments

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While the Chinese central government does its best to cool down the economy, many local governments aren’t following its lead.

In a few specific instances, Premier Wen Jiabao has demanded that local officials deal with run away investment. For example in the Tieben Steel fiasco—a 10.8 billion yuan (US$1.25 billion) steel project in Changzhou City—was revealed in April to have set up numerous subsidiary companies to avoid credit restrictions. Yet the Premier’s determination has not brought over investments to heal the economy. Last month, media in China reported another case – the Jianlong Steel Group similar to Tieben Steel in Ningbo city, in neighboring Zhejiang province. The scale of investment is similar, as are the methods used to bypass the central government’s approval procedures.

And, another steel project is carrying on quietly in Shanghai. The 11.78 billion yuan (US$1.4 billion) stainless steel project of Bao Steel Group just started production on December 18, 2003, and is quietly expanding the project, according to a Central News Agent report.

According to the Chengming Monthly, China’s State Council has recently rejected over 860 local projects, with a total proposed price tag of over 1.75 trillion yuan (US$211 billion). Yet China’s National Development and Reform Commission reports 22 provinces and major cities have drafted their 11th “Five Year Plan” (From 2006 to 2010). Proposed are 2,760 projects. The total investment involved is 28.8 trillion yuan (US$4.5 trillion). Shanghai is budgeting for 3 trillion yuan (US$362.2 billion) worth of investment; Guangdong, 4.8 trillion yuan (US$579.6 billion); and Beijing, 2.5 trillion yuan (US$301.9 billion). Analysts inside the Chinese government have compared the plans to “The Great Leap Forward” in 1958, which caused economic disaster resulting in nation wide famine from 1959 to 1961.

Over the past twenty years, in respect to economic reform, several big political and economic interest groups have formed in China. Local interest groups have representatives in Central government who provide “convenience” in matters requiring the Central government’s approval.

Local government leaders double as the representatives of local interests groups. Without competitive markets with independent competition boards, local business men routinely rely on local officials providing a large range of services, including access to credit from state-owned banks, and the ability to bypass the central government’s approval procedures. “Guanxi” or connections, remain more important in obtaining approval than whether any given project satisfies the approval requirements.

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