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China is investing too much, Wen warns

Written by: Staff
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BEIJING, March 4 (Reuters) Excessive investment growth is creating supply gluts that are driving down corporate profits and exposing banks to the risk of more bad loans, according to a speech Chinese Premier Wen Jiabao is due to give on Sunday.

In his annual report to the National People's Congress, China's parliament, Wen reaffirms that Beijing will perfect the country's currency regime and keep the yuan's exchange rate ''basically stable at a rational and balanced level''.

But he gives no details and offers no clues as to the future course of the currency, which to Washington's frustration has risen less than 1 percent since it was revalued in July and allowed to float in managed bands.

Wen says there are many factors contributing to a favourable economic outlook this year. But the harmful consequences of too-rapid growth in investment, the main engine of China's economy, are starting to become apparent.

''Production gluts are increasingly severe, prices of related goods are falling and inventories are rising. Business profits are shrinking, losses are growing and latent financial risks are increasing,'' Wen says in the speech, excerpts of which were seen by Reuters.

The government has been trying for two years to cool breakneck investment in sectors where supply is already outstripping demand, such as steel, aluminium and autos. Its greatest fear is that a wave of bankruptcies will create a new crop of bad loans, setting back efforts to strengthen the financial sector.

Given the risk of a rebound in investment, Wen says China must pursue proper policies to avert lurches in the economy. He singles out real estate as a sector requiring a careful watch.

But there is no suggestion of a radical policy shift. ''As for macroeconomic policy, the main task is continuing to implement stable and healthy fiscal and monetary policies,'' he says.

RURAL REVIVAL China's economy has grown by 10 percent on average over the past three years. Only the United States, Japan and Germany -- and possibly Britain -- now have larger economies.

Because of the strong momentum, the government will reduce this year's issue of special bonds, used mainly to finance infrastructure, to 60 billion yuan from 80 billion in 2005, Wen says.

Overall, the government is budgeting for a deficit this year of 295 billion yuan (.7 billion), close to last year's 300 billion yuan shortfall.

A major theme of the report is the need to boost consumption, especially in the countryside, where two out of three Chinese live and where incomes are just one third of the urban average.

If social security is improved and problems in education, healthcare and housing are addressed, people will feel they can afford to spend more, Wen says.

By boosting consumption, Wen's government hopes to reduce the economy's reliance on export-led growth, which is raising protectionist hackles in the US Congress. Law-makers are threatening tariffs unless Beijing lets the yuan rise faster.

Wen says China, whose trade surplus tripled last year to 2 billion, will strive for basic balance in its external accounts.

As well as importing more high-tech goods and scarce resources, Beijing will redouble its efforts to support outbound investment by Chinese companies. This jumped 26 per cent last year to .9 billion but was dwarfed by the .3 billion that foreign firms poured into China.

Wen says Chinese firms will get help to set up processing facilities, sales networks and research and development centres overseas.

Wen's government is also working on the assumption that gross domestic product will grow about 8 per cent this year and that consumer prices will rise 3 per cent, the excerpts show.

The government typically sets cautious growth targets. It also had a target of 8 per cent for 2005 but actual growth turned out to be 9.9 per cent.

REUTERS PM RK2152

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