China searches for soft landing

CHINA'S workers and their families are on holiday this week for extended May Day celebrations, but political leaders in Beijing are certain to be working overtime to ensure the country's booming economy does not overheat.

The mandarins have become increasingly concerned that the breakneck expansion of the past decade - with growth regularly topping 8% a year - is now too much of a good thing.

Policymakers and China-watchers point to rampant over-investment in boom sectors such as steel and real estate, and incipient inflationary pressures across the board. The task now is to ensure a soft landing, but no crash.

Ben Simpfendorfer at JP Morgan in Hong Kong says: 'We are expecting more tightening measures this week, including a rate hike. We are also looking for some tightening in credit lending to over-invested sectors.'

China's base lending rate is 5.38% and its one-year deposit rate 1.98%. Many observers are tipping a rise of half-a-percentage point in the lending rate, possibly the first in a series of increases.

The last time Beijing stepped on the brakes, in the early Nineties, rates were raised by a total of 3.3 percentage points.

This time, however, tightening monetary policy is a double-edged sword as it could put further upward pressure on the yuan's fixed exchange rate. The talk of a rate rise follows curbs on new projects in steel and other hot sectors.

Reports also suggest there has been a freeze on corporate loans from some banks until new measures are in place, while there has been a hardening in leaders' rhetoric about the need for a cooling off.

A call by Prime Minister Wen Jiabao for 'effective and very forceful measures' set the alarm bells ringing.

A key challenge in making any cooling-off effective is to ensure that Beijing's orders are applied in practice. The country's many provinces are notoriously determined to chart their course in economic policy.

But Yiping Huang, an economist at Citigroup, says the medicine is likely to work: 'While a slowdown in investment in the targeted industries is likely to accelerate in the coming months, it also suggests that the probability of an eventual hard landing should decline further.'