Beijing, August 13 :

China has called on its 31 provinces to rein in their economies, state media reported today, in a sign the central government has yet to persuade local bureaucrats that red-hot growth is bad.

Vice-premier Zeng Peiyan emphasised that investment in factories, residential buildings and other fixed assets must be cooled down. “The central government has made explicit requirements on economic work in the second half,” Zeng said during a recent trip to the southwestern province of Yunnan. “Fixed-asset investment should be put under tight control and more efforts made to lower energy consumption and improve environmental protection.”

China’s economy, the world’s fourth largest, expanded by 10.9 per cent year-on-year in the first six months of 2006, boosted by massive investment. Significantly, Xinhua reported that 90 per cent of all investment in the first half had been approved by governments at provincial level or below, reflecting different agendas in Beijing and elsewhere in the vast country.

Whereas the central government is concerned about macro-issues such as inflation and other symptoms of overheating, local governments prioritise growth because it means more jobs and less risk of social unrest.

Beijing may have awesome formal powers but its actual clout over decisions made hundreds of kilometers away is limited. In reality local officials are frequently calling the shots. “Local government dominance in Chinas economy appears the most important factor in Chinas macro-behavior,” Andy Xie, a Hong Kong-based economist at Morgan Stanley, said in a recent research note.

In the complex game between Beijing and the provinces, the provincial players have important tactical advantages, according to Xie. “Local governments can create a fait accompli by starting numerous projects to deter macro-tightening by the central government, as cutting off liquidity would keep these projects unfinished,” he said. “Second, local government leaders often have a more senior rank than their regulators in the Communist Party hierarchy and, hence, have a major say in macro-policy.”

The economies in three quarters of China’s provinces expanded at 12 per cent or more in the first six months, above the national figure of 10.9 per cent, the country’s key economic planner said.

Prime Minister Wen Jiabao demanded obedience to Beijing’s macroeconomic directives. “All localities and departments must unify their thinking and bring it in line with the central government’s assessment of the current economic trends,” Wen said.

It is testimony to the current importance of the provinces that local banks, often outside Beijing’s direct supervision and control, have been able to continue lending to investment projects. Commercial banks extended 2.34 trillion yuan ($290 billion) in the first seven months. This means the banks have already used up by 94 per cent of the total loan quota of 2.5 trillion yuan they have been given for the whole year.

Largest bond issue :

BEIJING: China’s ministry of railway plans to issue railway bonds worth 40 billion yuan (about $5 billion) this year to meet the country’s fund requirements for railway construction. Once approved by the Central bank and the State Development and Reform Commission, it will be the largest railway bond issue since China launched such a bond in 1995. The bond term, interest rate and major underwriters are yet to be decided, but it is certain that all the funds raised will be used for railway construction. Previous reports from the ministry said China would need 1.5 trillion yuan in railway construction from 2006 to 2010. The past two years alone have seen the commencement of 89 construction projects, whose aggregated investment is estimated around 600 billion yuan. — Xinhua