Nobody can tell exactly how much of the Fixed-Assets Investment (FAI), the largest factor to drive this nation's growth in gross domestic product (GDP), is in danger of becoming wasted or has already been wasted.

That is why a control mechanism on FAI is always needed, not just something that restarts only once every two or three years. The waste of money can be particularly serious when the control mechanism is weak and large numbers of unworthy FAI projects are undertaken by local governments and corporations.

A Chinese-language press report last week revealed disturbing news. According to a sample survey by an unnamed central government agency, of all the newly launched FAI projects in eight provinces, with 100 million yuan (US$12 million) or more budgets, more than 40 have "irregularities" regarding land acquisition, environmental evaluation, and procedure of project approval.

If the same proportion is applied across the nation, then in the first half of the year, when some 7,200 new FAI projects of the same budgetary category (100 million yuan or above) were reportedly undertaken, about 300 billion yuan (US$37 billion) might have been used to finance projects marred with "irregularities." This is only a calculation based on the average situation.

According to the Chinese-language Banyue Tan (Fortnightly Review), only less than 20 per cent of the FAI projects in the steel-making industry, from 2003 to now have undergone due approval procedures.

There is no way to tell how much of the alleged irregularity might have involved official corruption. And presumably, in every case, it was only possible because of some interference from regional officials. The sheer size of the industrial capacity in itself would put immense strains on the supply of raw materials, and on the already fragile environment at the same time.

On the corporate level, the waste, especially by publicly listed companies, can be widespread also in their independent FAI plans.

Take the company of a famous liquor brand for example. As a supplier of some of the most expensive brands of strong liquor for the Chinese banquet tables, the company has expanded its FAI spending more than five times in the past eight years. It has built a fancy headquarters and acquired new factories, only to achieve less than 50 per cent growth in net profit. Investors are not happy with these kind of corporations.

Whereas Mao Tai, a smaller but equally famous distillery, has achieved far better results in profitability by spending less than one-fourth of the other's FAI budget. In their 2005 revenue, the bigger company reported 6.4 billion yuan (US$790 million) while Mao Tai 3.9 billion yuan (US$481 million). But in net profit, as it was less than 800 million yuan (US$99 million), Mao Tai could show a proud 1.1 billion yuan (US$135 million). But Mao Tai is only a rare case. The majority of the local governments and companies on the Chinese mainland like to show a strong propensity, if not a fetish, for chasing materialistic, not financial, growths. Hoarding industrial capacity, like the ancient landlords did by taking hold of farms and livestocks, is the name of their game. And in an economy that rewards expertise, those who still play the old game will lose quicker than those who don't.

If China wants to stop its wasteful economy, it will have to make those in the hoarding game pay a high price for what they are doing.

Email: younuo@chinadaily.com.cn

(China Daily 09/11/2006 page4)