To cope with rapid credit growth, the government adopted a tight monetary policy, and has raised interest rates and deposit reserve ratio for commercial banks for three times since April.

Since the real estate sector is a major force driving investment growth, the State Council issued six measures on May 17 related to readjusting house supply structures and speeding up the formation of the low-rent housing system in urban areas.

In its Asian Development Outlook 2006 released in Beijing, the Asian Development Bank predicts that China's economic growth for 2006 will stand at 10.4 percent.

In its macroeconomic analysis and forecast report released on November 25, the Institute of Economics of Renmin University of China suggests that the Chinese economy faces a period of decline after rapid growth, but in 2006 China will still reach its highest GDP level in recent years, with the growth rate hitting 10.48 percent. According to the report, fixed assets investment in the year will shoot up 27 percent and the consumer price index will rise by 1.5 percent. Growth rates of narrow money and broad money supply will stand at 14.9 percent and 17.2 percent, respectively, while those of imports and exports will reach 27.2 percent and 23.4 percent respectively.

Irrational structure

However, a review of the Chinese economy in 2006 shows that an irrational economic growth structure still impedes economic development. Li Daokui, Director of the Center for China in the World Economy of Tsinghua University, holds that in the present Chinese economic growth structure, ultimate consumption, investment and exports account for 55 percent, 40 percent and 5 percent, respectively, and the proportion of investment is still increasing. This structure is quite irrational, containing big risks. It is worrisome whether such a high investment proportion could be transferred into profitable projects in the future.

Yin Xiangshuo, professor at the Institute of World Economy of Fudan University, believes that the Chinese economy may not be overheated as a whole, but the structure is not reasonable. For example, too much capital is put into sectors like real estate.

As a result, overcapacity is seen in some sectors, which began in 2003 and remains unsolved.

According to Zhu Hongren, Deputy Director of the Bureau of Economic Operations of the National Development and Reform Commission (NDRC), in 2005, structural adjustment was made in some industries with serious overcapacity, and progress was achieved after that. But in the first half of 2006, investment was still expanding rapidly. The investment scope in some industries with overcapacity was enlarging and the number of newly begun projects was increasing at a high speed, bringing trouble that cannot be neglected.

Statistics of fixed assets investment projects above 5 million yuan indicate that among industries with overcapacity, only a few saw their investments decline and most others are still experiencing strong investment impulses. Their investment growth rates are far higher than the overall growth of fixed assets investment in urban areas.

Figures from the NDRC and the National Bureau of Statistics indicate that production capacity of the auto industry has been 3 million units more than the actual demand; the surplus capacity rate in the coking industry will reach 24 percent this year; in 2006, the production capacity of the cement industry will exceed 1.35 billion tons while the demand only stands at 1.05 billion tons; surplus capacity of the coal industry is 150-200 million tons; and in the iron and steel industry, the production capacity had reached 470 million tons by the end of 2005 although the estimated demand was only 300 million tons.

"Coping with overcapacity, we are facing severe challenges," said Zhu.

Beyond the irrational economic structure, there is another uncertain factor - the foreign exchange reserves of China have exceeded $1 trillion, making the country the largest foreign exchange reserve owner in the world.

What influence will such a large amount of foreign exchange reserves bring to the Chinese economy?

The economic circles both at home and abroad are still debating this issue.