Monthly data showing slowed investment and industrial production growth may not be enough to convince Chinese policy-makers to rapidly relax macroeconomic control. Yet, recent warnings of a possible slowdown in the US economy next year does require them to prepare as early as possible for its impact on China's economic growth.

Latest statistics indicate that the country's efforts to cool down investment-led economic growth are taking effect.

China's urban fixed-assets investment growth slowed to 26.8 per cent year-on-year in the first 10 months this year, down from 31.3 per cent for the first half of the year. In monthly terms, investment growth has dropped from above 30 per cent a few months ago to about 17 per cent now.

Meanwhile, industrial production increased only 14.7 per cent year-on-year in October, a bit slower than September's rate of 16.1 per cent.

Along with the decline of 0.9 of a percentage point in gross domestic product growth in the third quarter, these new monthly data apparently confirm that the country's overly rapid economic growth is being brought under control initially.

Lessons drawn from previous rounds of macroeconomic control justify the authorities' wait-and-see approach at present. If tightening measures were relaxed too soon, investment could rebound vehemently, to the detriment of the national economy.

Policy-makers should take time to observe if fundamental changes have taken place in the way domestic enterprises make investment decisions. Only when such investments become more environmentally and resource cost-aware can the country's goal of delivering stable and sustainable economic growth be achieved.

However, while reining in excessive and extensive investment growth, China also has to ensure the economy is moving fast enough to create jobs for its huge labour force.

Hence, if a strong rebound in investment growth is not what policy-makers expect next year, they should consider responses now in case a US economic slowdown hits the country's exports in the future.

International observers are cutting their 2007 US growth forecast, though, to different degrees. Some even issued a "recession risk" warning.

A slowed US economy will not only bring down its imports from China but will also affect other economies and could undermine global demand for Chinese exports.

Given China's overwhelming dependence on investment and export as the two major growth engines, it would be too much for the national economy if both engines cooled down at the same time.

An obvious option is to boost domestic demand, particularly consumer spending, to maintain the country's economic growth momentum. This is certainly not an easy task.

The prospect of an undesired economic slowdown should be a reason for policy-makers to launch a new round of reforms to create the needed conditions for domestic consumers to spend more.

Source: China Daily