History repeats itself. But sometimes, it repeats only part of itself.

That seems to be the case for the Chinese economy since last year.

A few economic indicators have been rocketing since 2003, peaking in the first quarter of this year.

The hottest figures are the growth rates of fixed asset investment and banking loans.

Fixed asset investment grew by almost 50 percent during the January-March period. Money supply has been stable at 20 percent since last year.

To some, this is reminiscent of the heady years of 1992 and 1993, when investment grew 38 percent and 50 percent, respectively.

They worry that the economy is overheating and the unsustained rate and possible austerity measures from the government will make the economy crash with a hard landing, which refers to an abrupt contraction that could be accompanied with corporate failures, a financial meltdown and rising unemployment.

However, right from the first overheating warning signs last year, there have been voices of disagreement.

And the contention among economists and different government departments is still evident.

"I would not say it is overheating,' said Xu Hongyuan, a senior economist with the State Information Center, a key think-tank for the National Development and Reform Commission.

"There are just some structural problems, over-investment in some sectors, but nothing more than that."

Overheating is a word that befits a much more sweeping situation, like what happened in the early 1990s, Xu said.

China saw white hot stock, futures and real estate markets and a rage in building in the so-called development areas in 1992 and 1993. The price index soared to double-digit figures.

But now, the problem is mainly surging investment in certain areas and a shortage of power, petroleum and some other resources, he said.

Equity and commodity markets are performing steadily. The price index, though creeping up, is still well below the 5 percent level that is regarded as the threshold for real inflation.

The price index is the key indicator for inflation and the temperature of the economy.

The consumer price index hovered around 3 percent during the first quarter of this year. But during 1992-94, the major price index was in the territory of 15-25 percent.

"So the economy is not overheating now," Xu said. "And discussions over a soft or hard landing are meaningless. The economy does not need to land at all."

But Fan Gang, a renowned economist and director of the National Economic Institute, said the soaring investment growth alone indicates that there is overheating as the high investment figures reflect a general imbalance between supply and demand.

Within the government, the most important warning sign comes from the central People's Bank of China, which in its first-quarter monetary policy report directly voiced its concern for full-fledged overheating.

However, the bank's vice-governor Wu Xiaoling, speaking at a regional forum at the end of April, qualified her comments, saying that the economy is overheated "if measured by the sustainability against the availability of resources," because none of the nation's energy, water and land resources can support the current growth.

Indeed, the stress on resources is one of the main characteristics of this round of surging investment.

Officials from almost all of the other economic policy making bodies stopped short of accusing the economy of being overheated, although they said there were many unnecessary projects.

Hence, they said, a selective approach - instead of sweeping round of cooling off, is needed.

The aim of choosing this approach is to maintain the economy's growth momentum and avoid a drop off in growth.

The central government has been sweeping through projects that have broken laws and regulations in terms of land use and environmental protection. It also pointed out that the steel, aluminium and cement sectors are over-invested.

Realizing that various local governments were pushing for some redundant projects, the central government, using administrative measures, told local governments to refrain from continuing to do so.

Although the central bank was the first and most explicit in its warning, it only adopted mild measures, instead of being aggressive and raising interest rates.

It increased reserve requirements to the commercial banks and issued them bills. It is intended to reduce the banks' lending funds, but will not increase investment costs for all enterprises as an interest rate increase does.

"My concern is not overheating. I am afraid of unnecessarily tough braking steps," said Zhang Liqun, a senior research fellow with the State Council Development Research Center.

With the net export shrinking and consumption stable, a significant slowdown of investment will cut the economic growth rate under the desirable level, Zhang said.

It is widely believed that the Chinese economy needs to grow by at least 7 percent annually to create jobs for the new workforce and those let go through the restructuring of State-owned enterprises.

"After all, we are still facing challenges in employment," Zhang said, "So I support the government's approach in dealing with the current situation. It will work."

In fact, it has already started to work. Investment growth, credit growth and steel price have all been curtailed.

Zhang said he is also optimistic because market forces have a much bigger role in determining supply and demand than they did a decade ago.

"So many problems will be rectified by market forces now," he said.

Stephen Roach, Morgan Stanley's chief economist, shares Zhang's view, although he says the economy is overheating.

Roach noted that the investment bubble of a decade ago was largely an end result of State-sponsored excess, while the current investment dynamic reflects the mixed impetus of public and private spending.

"To the extent that private sector investment is driven by market-based returns, the risk of a misallocation of capital would be lower," he said.

"Inasmuch as the seriously unbalanced Chinese economy of a decade ago managed to sidestep a hard landing, I am confident that the intrinsically stronger Chinese economy of today will be equally successful. Consequently, I remain in the China soft landing camp."

While an appropriate investment slow-down would be good for the health of the Chinese economy, there is the worry that it would negatively affect regional and even global economies.

"I would not buy this," the State Information Center's Xu said.

(China Daily June 7, 2004)