Agence France Presse

Beijing, March 15:

A warning from Chinese premier Wen Jiabao that handling the economy could be as tough as coping with the SARS epidemic reflects staggering challenges ahead, analysts said today.

Wen did not sound like the man in charge of the world’s fastest growing major economy as he met the press at the end of parliament’s annual session, warning of over-investment and rising prices.

“This task is no less severe than the SARS epidemic we had to deal with last year,” Wen said in the televised press conference yesterday at the conclusion of the National People’s Congress, “If we fail to manage the situation well, setbacks to the economy would be inevitable.”

The most talked-about economic problem in recent months has been the development of an economic bubble in real estate and in industries such as auto and aluminum. Underlining this danger, data released by the National Bureau of Statistics today showed the highest level of activity in the real estate sector in nearly a decade.

Investment in real estate development totaled more than $120 million last year, up by 29.7 per cent from 2002 for the fastest rise since 1995, the bureau said.

“The Chinese economy comes up with a bubble whenever it has a chance,” Andy Xie, a Hong Kong-based economist with Morgan Stanley, said in a research note today, “Chinese people have a high preference for gambling. If you want to verify, just check out the casino nearest to you.” While China’s economy grew by 9.1 per cent last year, the 800 million people living in the destitute countryside only saw limited gain. It could be costly for the government to seek to suddenly lift the incomes of two-thirds of the population, with measures such as a reduction in taxes that have so far provided a reliable income for the government. But analysts agree reforms in the rural areas are long overdue, after more than a decade of exclusive focus on development along the prosperous eastern seaboard.

Rural incomes rose just four percent last year, half the increase in the cities, and farmers now on average make less than one third of the city dwellers. Scattered reports of unrest in the countryside — sometimes involving thousands of protesters — may have motivated the government to act.

“Dissatisfaction in rural areas has reached an unparalleled level,” said Chen Xingdong, chief economist with BNP Paribas Peregrine in Beijing, “It’s like a balloon, if you keep inflating it, it will eventually explode.” China’s financial system, the glue that keeps the entire continent-sized economy together, is yet another weak link in the complex equation the government in Beijing is trying to solve. After seeing no genuine reform for half a decade, the four large state-run commercial banks are now being readied for listing and for a more competitive future, as foreign rivals are expected to enter China in a big way.

“Several major reforms started in the banking sector last year and need to be deepened this year,” said Wang Zhao, an economist with the Development Research Centre, a state-run think tank.

“So this year is a very important year, with the reforms at a crucial stage,” he said.

Premier Wen used his press conference to compare the management of China’s economy to steering a large ship. The comparison is apt, as keeping on an even keel is really what current policy-making in Beijing is all about, according to analysts.

Contrary to the previous government that often would push for growth at any price, Wen’s Cabinet pursues multiple goals that include reducing employment, fighting inflation and keeping a sound balance of payment.