Fixed-asset investment has picked up considerably in the first five months of this year. In urban areas, for example, it increased 30.3 per cent year-on-year.

This accelerated investment has the following attributes.

First, the investment structure is being optimized. Much more money is being funnelled into "new countryside" construction projects such as the building of roads, waterworks, schools, and health care facilities. Investment in this regard increased 36.3 per cent compared with the corresponding period in 2005.

Investment in the service sector rose 27.5 per cent year-on-year.

But investment in real estate, the focus of the State's macroeconomic readjustment, was 2.5 percentage points lower than last year.   

Second, investments by localities outstripped those made by the central authorities. Between January and May, for example, investment in projects initiated by the central authorities rose 22.7 per cent. In contrast, investments by localities increased 31.3 per cent in the same period.

Third, the number of newly launched projects and those under construction keeps rising. By the end of May, for instance, there were 20,000 projects involving an investment of 500,000 yuan (US$62,500) and above in urban areas and townships across the country, of which 10,000 were new projects. Investment in new projects was 23.6 per cent higher than in the same period last year.

Such high investment is a result of accelerating industrialization and urbanization. It is interesting to note that this round of high investment has not been accompanied by serious inflation or bottlenecks in energy resources and transportation, the attributes of previous rapid expansions in investment.

Therefore, the current investment growth can be described as reasonably fast.

In the long term, however, high investment is bound to lead to a disproportionate relationship between money input and consumption. In addition, the newly increased productive capacity brought by investment growth has to find an outlet in exports. This is likely to cause disequilibrium between outward-looking and inward-looking economies. Finally, the fast pace of investment ultimately has an impact on the fragile environment and is, therefore, detrimental to sustainable development. 

The following factors drove fast investment growth in the first half of the year  a fast increase in loans and credit extensions, lax controls on land use, a strong investment momentum on the part of the local governments, good results seen by enterprises and an improved supply of resources.

Looking forward, investment will continue its rapid rise in the latter half of this year. Five factors will drive this investment.

First, bank savings are increasing at the same pace as the improvement of enterprises' economic efficiency. By May this year, the nation's bank deposits had increased by 19.6 per cent year-on-year. This constitutes a rich money reservoir investors can draw upon. At the same time, enterprises that see good economic results have accumulated large amounts of capital of their own. All this is expected to power investment's fast growth.

Second, institutional factors that drive the investment remain unchanged and the local governments still have a strong desire to invest.

The market of production factors is fairly undeveloped. Meanwhile, scarce resources such as land and energy find it hard to realize their value through price fluctuations on the market. As a result, cheap resource prices lure investment into, say, numerous land property projects.

At the same time, administrative means, instead of market leverage, are applied in some cases to the distribution of resources and their management.

This plays a major role in fanning the flames of fast investment growth. Some local governments, for example, make huge investments to ensure the rapid growth of local GDP. But this is done with scant regard to the damage either to the local environment or overall social harmony.

Also, the existing taxation system based on indirect tax encourages local governments to favour investment and overlook consumption.

These kind of institutional factors are unlikely to fade away in the short term. As a result, it will be hard to put the brakes on this accelerated investment.

Third, the 11th Five-Year Plan (2006-10) offers opportunities for expanded investment.

Large numbers of industrial projects are being launched in the first year of the plan, which is bound to shore up investment.

Fourth, strong overseas demand for Chinese commodities constitutes another factor powering investment.

The global economy is showing signs of fast growth in 2006 and the United States, Japan and European countries, which are China's major trade partners, are all enjoying favourable economic prospects.

The International Monetary Fund estimates that the world economy will grow by an average of 4.9 per cent in 2006. The US economy will grow by 3.4 per cent, Japan by 2.8 per cent and the countries in the euro zone by 2 per cent. This facilitates the export of Chinese-manufactured goods.

On the other hand, the revaluation of the renminbi in small margins will not have many negative effects on Chinese exports.

The speeding-up of exports powers the investment in export-oriented enterprises. And this kind of driving force is not likely to weaken in the immediate future.

Fifth, local governments remain a key factor to carry out the central government's readjustment policies to put the brakes on increased investment.

In view of the problems cropping up in the operation of the Chinese economy, the State has worked out a package of readjustment policies, some fine-tuning and others preventative.

For example, a six-point circular issued by the Ministry of Construction and eight other commissions and ministries, is aimed at reining in soaring real estate prices and improving the structure of the land property sector. 

At the same time, the central bank revised the interest rate on loans up by 0.27 percentage points. The State Development and Reform Commission worked out adjustment plans for 11 industries that have excessive productive capacities. In addition, the commission, together with the Ministry of Land and Resources and the China Banking Regulatory Commission, issued a circular to control the launch of new land property projects, sort out newly launched ones, improve land management and strictly control loans given to real estate projects.

All these policies and regulations are eventually intended to slow the growth of investment in fixed assets. 

The State ought to strengthen its controls on the flow of currency, tighten its grip on land supply, rearrange the prices of scarce but vital resources, and promote the reform of the taxation system in order to check blind investment growth and channel capital to sectors where it is most urgently needed.

In short, this is meant to root out the causes of investment impulses from the institutional point of view, with tightening control on loans and land supply as the departure point. 

Currently, the money possessed by individuals and social groups abounds but has yet to find an investment outlet. At the same time, some weak sectors badly need capital but have no way to get it.

In view of this, large sums of cash owned by society ought to be attracted to the construction of railways, highways, ports, urban rail system, new energy and rural infrastructures in order to help improve the country's investment structure.

The author Niu Li is a researcher from the State Information Centre.