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Can China temper the boom?

Chinese growth is at its fastest pace in a decade. But in order to avoid a hard landing, China must temper investment to subdue growth.

Worries over a hard landing in China have intensified with the news that growth is hurtling along at the fastest pace in a decade. GDP expanded by 11.3% in the second quarter, driven by a 35% jump in corporate fixed-asset investment. The key now is to temper investment in order to subdue growth; one way to do this, notes The Economist, would be to require China's state-owned firms to pay dividends to their main shareholder, the government (some already pay dividends to private investors).

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Investment is currently largely financed by retained corporate profits; firms are even bigger savers than households, with their savings comprising more than 20% of GDP. China's 169 biggest state-owned enterprises (SOEs), including PetroChina and China Mobile, declared after-tax profits of $75bn last year. Skimming some of this off in the form of dividends would force companies to spend the rest more carefully, reducing the "wasteful investment and overcapacity" so common in China.

Lower investment would reduce China's tendency to veer from boom to bust. The money could also be spent more profitably elsewhere; the World Bank reckons that if half the SOEs' 2004 profits had been allocated to education and health, overall government spending would have been 85% higher, a fillip big enough to waive school fees across the country and encourage consumption, as the government has been trying to do for some time. Given all this, some action on the dividend front is likely before too long.

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