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Last Updated: Thursday, 26 August, 2004, 06:51 GMT 07:51 UK
China's economy 'still at risk'
Chinese worker in oil refinery
Beijing is trying to cool down its industrial boom
China's leaders should not relax their efforts to cool the country's fast-growing economy, the International Monetary Fund has warned.

The IMF's latest health check on China's booming but unbalanced economy found that "a soft landing...is not yet assured".

It urged China to introduce a more flexible exchange rate without delay.

The IMF now expects China to grow 9% in 2004, beating an earlier forecast of 8.5%, before cooling to 7.5% in 2005.

Signs of progress

The IMF found signs that Beijing's efforts to curb reckless lending for expansion projects by its undisciplined banking system are paying off.

But it remains concerned that China's rapid growth could still tip over into a damaging crisis if pressure on the banks is not maintained.

Beijing has issued a blizzard of edicts warning of tougher scrutiny of bank lending, freezes on loans for new factories in over-supplied sectors like steel, and penalties for officials who ignore these guidelines.

The IMF warned of the limitations of political pressure as a method of regulating the economy, pointing out that "if the administrative controls become less effective, credit growth could take off again".

Lending fears

Many economists think that sweeping reforms to China's financial institutions are needed to introduce more effective credit checking systems and market-driven controls.

McDonalds in China
Foreign companies have invested in China, helping fuel economic growth

China's banks are weighed down by bad loans to state enterprises, estimated at 45% of loans by credit agency Standard and Poor's.

Nonetheless, the IMF noted that the banks have no shortage of cash - or "excess liquidity in the banking system" - to carry on lending.

This is because Chinese are thrifty savers, giving the country one of the highest household savings rates in the world, so there is a risk of these deposits disappearing on unsustainable industrial projects.

Banking sector reform was "of particular importance to ensure future financial stability and sound competitive banks", the IMF said.

'Tackle the yuan'

With some signs of falling foreign investment and success at lowering inflation, the IMF urged Beijing to act to loosen the yuan's peg to the US dollar, which has been criticised for unfairly cheapening China's exports.

"In view of the present favourable circumstances, it would be advantageous for China to make a move towards initial exchange rate flexibility without undue delay", the IMF said.

Inflation has been pushed up by billions of dollars of foreign investment pouring into China, bank lending to domestic firms to build new plant, and shortages of farm produce.

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13 Jul 04  |  Business

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