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Shirley Yam

IT'S BEEN FOUR months since President Hu Jintao kicked off the latest government crackdown on overinvestment. Yet, monetary and legal measures don't seem to be working, in large part because growth-hungry local officials are ignoring the dictates from on high.

What next?

If the history of the last big austerity campaign in 2003 is any guide, the next step will be a widely publicised crackdown on a high-profile project, perhaps accompanied by the  heads of some recalcitrant officials rolling.

Officially, the last campaign began in August 2003 when the National Development and Reform Commission warned of overinvestment.

Various measures were imposed to control skyrocketing raw material prices. But the economy showed few signs of cooling.

On March 24, 2004, banks' reserve ratio was increased. On April 9, Premier Wen Jiabao  said a new plan to curb overinvestment would take effect in the middle of that month.

In a front-page editorial on April 29, the People's Daily  called on cadres to implement central government policies aimed at reining in the economy. On the same day, the construction of a mammoth 10.5 billion yuan steel project, Jiangsu Tieben Steel, was halted on Beijing's order. The reason given was that Tieben failed to secure a needed permit to build on farmland.

Six local officials, including a deputy mayor, were censured or sacked. Tieben's chairman and eight executives were carted off to jail.

In less than two weeks, provincial government and bank officials issued statements apologising for facilitating and funding the 'unviable? project and promised to impose tighter controls in the future. In May, loan growth, which had been growing quickly, halted on its tracks.

This week, as the half-finished skeleton of the Tieben Steel plant lies rusting under the summer sun,  the People's Daily came out with another editorial calling on local cadres to implement the central government's austerity measures. Once again an ultimatum was issued and special teams were dispatched to make sure Beijing's orders were being followed in key regions and industries.

Can another Tieben Steel-style crackdown be far behind? This is the  long-standing practice of killing the chicken to scare the monkey. Credit and investment growth will slow down. But will it stop there?

History suggests otherwise. In 2004, banks did slow credit expansion but largely for working capital and short-term loans, not the long-term lending that fuelled the investment boom.

New projects were blocked but mostly those belonging to private enterprises.

Even that didn't last. As private entrepreneurs, who accounted for an increasing share of growth and most of the economy's dynamism complained, the administrative austerity measures were relaxed by late 2004.

Another liquidity squeeze on the private sector is highly likely, though it may not be as hard this time. Yet, the campaign is unlikely to stop here.

There are two significant differences between now and 2004. First, foreign money is flowing into China on a far greater scale. Those inflows pose serious problems for the government,  as they provide companies with a ready alternative to bank loans.

Already, investment bankers and fund managers  are receiving proposals from local governments seeking to finance their infrastructure projects, which would normally be funded by bank loans. Local bureaucrats are willing to sell high-yielding debt to get the cash they covet.

The second and perhaps more important difference from 2004 is that officials at all levels are jockeying for position in advance of a government shake-up expected  late  next year. While local bureaucrats remain eager to pump up their economies, state leaders are equally determined to win Beijing's favour by helping cool the overheating economy.

It's important to understand that the coming reshuffle in the politburo will be more than ceremonial. Discussions on the chances of Wen Jiabao getting a second term and assessments of his performance in the economic policy arena have  not died down in Beijing. Moreover, half of the politburo will reach retirement age next year.

In the current austerity campaign, local rulers are staging an open  tug of war with the central government. Failure to stop runaway local expansion will jeopardise not only the country's economic well-being but also the authority of the current administration. Its impact on the upcoming reshuffle can only be understated.



Runaway growth reflects local leaders' tug of war with Beijing