More truth has been revealed about attempts by Inner Mongolia Autonomous Region officials to build unlicensed power plants.

Their wasteful plans were openly chastised by the State Council, and according to sources quoted in Chinese-language press, the waste is significant enough to affect the financial health of the nation as a whole.

Some reporters quoted unnamed Inner Mongolian officials as saying that if all the unlicenced projects in Inner Mongolia's power industry are stopped, as ordered by the central government, some 40 billion yuan (US$5 billion) of capital investment, including more than 30 billion yuan (US$3.75 billion) in bank loans, will be lost.

Inner Mongolia has been only one of the provincial-level units to report the fastest growth in gross domestic product (GDP) in the past couple of years. Local officials embarked on one big-ticket project after another but were not given approval by the central government. Lured by the chance of reaping fat interest returns, the banks, without checking the government papers the projects needed, granted loans to them anyway by the truck load.

The Chinese-language press reported that in the first quarter of 2006, there were 10 provincial-level units in China and each launched 1,500 or more fixed assets investment projects. They are Henan, Hebei, Liaoning, Hubei, Sichuan, Gansu, Hunan, Anhui, Jiangsu and Inner Mongolia. There were more than 19,000 new projects, accounting for 56 per cent of the new projects in the entire Chinese mainland.

These projects are mostly in the provinces, which have lagged behind the southern and eastern coastal regions in trade and urban development since the 1990s. Now they are driven by jealousy and also legitimate ambition, which is sometimes mixed with self-interest. Local officials are understandably trying so hard to get their projects launched, they even have been defying Beijing's authority.

However, most of the projects do not consider the market competition. They are not drawn on prudent calculation and forecast, nor are they consistent with national planning. They are the worst kind of combination of market trends based only on short-term impulses and intuitive reactions to the recent price changes.

Judging from the limited accounts from the first quarter, officials dished out more than 30,000 new fixed assets investment projects across China (including 19,000 from the 10 provincial-level units mentioned above). The budget for each project can easily be estimated at 100 million yuan (US$12.5 million). This would then add at least 3,000 billion yuan (US$375 billion) to fuel GDP's unbridled growth.

The waste, especially in the projects that failed to earn approval from Beijing, is alarming.

If so much wasteful investment is allowed to continue, it could bring China to a state of overcapacity and, more dangerously, a credit collapse.

Over the weekend, as some domestic press articles revealed, officials from central agencies are leading inspection rounds in the provinces in preparation for a government financial conference later this year.

It would seem unavoidable for the central government, after the recent hike in interest rate is yielding only a limited effect, to take more actions to rein in the rampant investment craze.

It would be curious to see how the State-owned banking system, which has habitually provided easy credit to the local project owners, would change their business practices and learn to be more selective in managing their loan portfolios. From now to the end of the year, major adjustments can still be seen in China, as Beijing is determined to bring down the number of the fixed assets investment projects.

Email: younuo@chinadaily.com.cn

(China Daily 08/28/2006 page4)