Cause of overheating lies closer to home
This week the government is set to announce more economic data for last month, which is likely to indicate a strong economy with no sign of slowing down despite a series of tightening measures.
The most recent signs of continuing economic buoyancy emerged on Friday, when it was revealed the trade surplus surged last month to the second-highest level on record. The strong growth confounded expectations of a slowdown in exports following Beijing's decision to cut export tax rebates on more than 2,800 products from July 1.
More ominously, the broad money supply, M2, had risen at a faster rate of 18.48 per cent year on year by the end of last month, up from 17.1 per cent at the end of June.
The strong growth came despite the People's Bank of China having raised interest rates three times and commercial banks' deposit ratios by six times so far this year to curb inflation and liquidity in the economic system.
Late last month the Communist Party's Politburo agreed that preventing economic overheating would remain the top priority, expressing serious concerns about the rapid rise in investments and bank lending, the widening trade surplus and soaring inflation.
The release of last month's figures will no doubt prompt calls for more tightening measures and many have pointed to one obvious culprit. Over the past few weeks state media have carried many reports warning about the illegal inflow of foreign funds, and blaming overseas investors for fanning the rise in the stock and property markets in particular.
They have speculated that nearly US$100 billion in foreign funds entered the stock and property markets through illegal channels in the first half of this year, with overseas property developers expanding aggressively in second- and third-tier cities following the spectacular rise in property prices in the major cities.
Judging from the reports, an intensified crackdown on illegal inflows of foreign funds is expected soon.
Although that may help curb speculation in the markets, both the media and officials have grossly overstated the role of foreign funds in contributing to the overheating in the economy. Many officials at state firms and economists have also fanned nationalistic sentiment by attacking the sale of state assets to foreigners.
But while shifting the blame, the government seems to have turned a blind eye to the fact that the state-owned enterprises are the biggest speculators in the property and stock markets, making them one of the root causes of economic overheating.
The leadership's tightening measures will have limited impact - as has been the case in the past two years - as long as the major state firms are free to go on expanding.
Ironically, state firms have been the biggest beneficiary of tightening measures launched in late 2004 to cool down economic growth.
Since 2004 the leadership has aimed its wrath at private-sector firms, blaming them for runaway investments in steel, car, aluminium, property and other mega industrial projects.
As a result, the private sector has been the hardest hit, with its access to bank loans narrowed and market access limited. Meanwhile, the tightening measures have had little affect on state firms, which enjoy stronger support from the banks and government and are expanding aggressively in areas and industries in which private firms are suffering.
This has led to a debate within the government over the so-called trend of 'the state on the offensive and private sector on the retreat'.
And the trend is going from strength to strength. Take the property market. The most active and aggressive property developers at land auctions are more often than not state owned - Beijing North Star, Poly Real Estate, to name two.
Compared to the private and foreign firms, these state developers have easier access to bank loans and support from their parent companies. And these are usually the major state conglomerates.
Many state firms are also speculating heavily in the stock market. Recently the state-owned Assets Supervision and Administration, the regulator, has publicly censured two state-owned conglomerates for diverting huge sums of money to speculate in stocks.
Analysts said that was just the tip of the iceberg. As the banks are forced to tighten lending, the state firms have become their safest clients.
So long as the state firms are left to operate unfettered, the mainland's tightening measures will be ineffective.