The warning against serious overcapacity buried deep in the autumn report of the Chinese Academy of Social Sciences (CASS) is a loud call for attention from policy-makers.

If the problem of overcapacity cannot soon be put on the radar screen, the cost of correcting it belatedly will only surge.

Overall, the upbeat growth forecast by the CASS is unlikely to differ much from the reality of the national economy. We will soon know for certain as official figures for third-quarter growth come due.

The report predicted that China's gross domestic product (GDP) will rise by 10.5 per cent this year and slow to 10.1 per cent next year.

A stunning 11.3-per-cent GDP growth in the second quarter has pushed the country's economic growth to 10.9 per cent in the first half of the year over the same period in 2005, the highest in recent years.

Hence, an annual growth of 10.5 per cent would mean a much-desired slowdown in the second half year thanks to the government's macro control policies. A further slowed growth pace in 2007 indicates that the tightening measures the Chinese Government has adopted will continue to work.

While the CASS report shows that headline figures on consumption, investment and trade bode well, caution against overcapacity may not seem so urgent.

In the first half of this year, China's total retail sales of consumer goods, fixed-asset investment and trade volume surged by 13.1 per cent, 29.8 per cent and 23.4 per cent year-on-year respectively.

Latest statistics point to an expected development of further accelerated consumption growth and cooled investment growth in July and August.

Admittedly, robust growth of the economy has reduced oversupply for the moment. But the threat of future overcapacity has not subdued as well.

Production capacity in some overheated sectors like steel and aluminium has hugely expanded following investment booms in recent years. Policy-makers also made it a priority to prevent overcapacity in these sectors in late 2005.

However, runaway investment growth in the first half of this year has not only boosted demand for industrial products like steel and aluminium, but also diverted the authorities' attention from emerging overcapacity to unchecked credit growth.

The warning in the CASS report is not far-fetched. While policy-makers are engineering a soft-landing, they should not fixate merely on investment growth numbers. The imbalance of production and consumption is what they should guide the market to correct.

(China Daily 10/12/2006 page4)