Measures should be taken to ward off deflationary risks after the country cools down its overheated economy, according to an article in Beijing-based Outlook Weekly magazine. An excerpt follows:

Thanks to timely, effective and strict measures by the central government, China's overheated economy is expected to realize a soft landing. Since last year, some sectors, like steel, aluminum, cement and real estate, have slowed their pace due to strict examination and approval of newly-planned projects, clamping down on illegal land use and disciplining lax officials.

It should be hailed for achieving a series of macro-control measures. Meanwhile, negative effects that take place after the cooling down of the overheated economy should be scrutinized to avoid drastic economic ups and downs.

First, the risk of deflation should be negated.

In 1996, when China successfully realized its economic soft landing, it began to suffer from deflation. Deflation leads to decreasing prices and lower corporate returns. On the other hand, due to decreased income and fewer job opportunities, consumers' purchasing propensity and power are also dampened. All of these factors hinder sound economic development.

It is feasible to use administrative measures to cool down the economy, but it is difficult to use such measures to cure deflation.

Second, the interests of farmers-turned-workers must be protected.

Sectors involved to be cooled down, including steel, aluminum, cement and real estate, are also sectors that have employed a large number of migrant workers.

Newly-planned projects that are cancelled or postponed will cost many farmers-turned-workers their jobs. As well, when construction bosses are experiencing cash flow problems, they might delay payment for migrant workers. The government should take steps to create more job opportunities in order to increase the income of migrant workers.

Last, after construction projects are cancelled or postponed, proper measures should be taken to minimize economic losses. In the past, many such projects were simply laid idle and bank debts they incurred were not recovered. Much of that loss was shouldered by the government.

A main reason for overheated economy is that the economic development is controlled by the local government. Governments at all levels stress competition among official achievements and sometimes they kick start copycat image projects in a blind way.

To avoid the next round of overheated economy, local government should shift their function from controlling the economy to providing public services and let the market play a larger role.

(China Daily May 28, 2004)