Any increased investment should flow to emerging and innovative industries instead of those sectors with overcapacity

A photograph of Wang Zhongbing, Zhanjiang's mayor, kissing the newly-inked approval for the city's long-coveted steel project in front of the headquarters of the National Development and Reform Commission has quickly spread across China and become a heated topic of debate.

"I am so excited at this moment," Wang said when China's top economic planner approved Zhanjiang's request to build a mega-steel project in the port city in Guangdong province on May 25. When completed, the steel plant is expected to have an annual output of 10 million tons, providing a big boost to local employment and GDP growth.

But despite its positive role in bolstering local economic growth in the short term, the approval of such a mega-project at a time when China's steel sector faces serious overproduction has also caused some concern. Statistics show that China's medium and large-sized steel enterprises suffered a deficit of 33.75 percent in the first four months of this year, with the total losses reaching more than 10.4 billion yuan ($1.64 billion), 32 times their losses during the same period of 2011.

Besides the negative influences arising from the national economic slowdown, the widespread losses suffered by China's steel enterprises over the past months have been directly related to the long-lasting overcapacity of this sector and their low-end products. For example, the output of China's crude steel reached 900 million tons in 2011, accounting for 46 percent of the world's total crude steel output, yet China still depends on imports for high-end steel products. The National Development and Reform Commission has repeatedly issued orders and regulations aimed at curbing the blind expansion of domestic steel production. In 2009, a harsher-than-ever ban was even promulgated on the launching of any new steel projects within three years.

The approval of the Zhanjiang steel project came amid the country's accelerated efforts to promote steady economic growth following signs that macroeconomic conditions are continuing to deteriorate. To contain the worrisome slowdown momentum, the State Council vowed at an executive meeting in May to stabilize economic growth and demanded that big projects that can produce fast economic effects be launched at a faster speed. The message transmitted from the meeting, together with a series of other monetary and credit policies and measures, has been viewed as a move to change its established tight macroeconomic and monetary policy. At a time when it is difficult to quickly expand domestic demand and exports are unlikely to increase in the context of a deteriorating sovereign debt crisis in Europe, investment is once again considered the top choice to spur economic growth.

The 69.68-billion yuan steel project in Zhanjiang accounts for almost half of the city's annual GDP, which stood at 165 billion yuan in 2011. The planned annual output of 10 million tons of steel after its completion in three years is also expected to be a huge driving force for the sustainable growth of the local economy.

But at a time when there is obvious overcapacity in the country's steel sector, the launching of such a large steel project has also caused concerns over the possibility that the government will sacrifice its commitment to adjust economic structure to promote economic growth.

Yet it is necessary that the country take some tailored measures to boost economic development to prevent the national economy from slowing too fast. An accelerated economic slowdown in a country with China's population, if not curbed, will not only be unfavorable to its social stability, but will also hamper its ongoing efforts to push for structural adjustments and transformation of its long-controversial economic growth model. However, approving the Zhanjiang project as part of its efforts to stimulate the country's GDP growth is beyond people's expectations.

China's macroeconomic conditions over the past four months have not been good, but conditions have not deteriorated to a degree that should cause grave concerns.

Facing suspicions from the outside, the National Development and Reform Commission said that the launching of the Zhanjiang project is based on a sizeable cut in local steel production. It is expected that a total of 16.14 million tons of crude steel production will be slashed in Guangdong province. But the problem is what relevance such a production cut will have if the Zhanjiang project is not aimed at manufacturing the high-end steel products that China badly needs.

Past practices indicate that loosening the country's monetary policies and accelerating government investment purely for the sake of short-term economic effects will not only be detrimental to its long-term economic growth and stability. It will also foil its ongoing efforts for economic structural adjustments. The best way to promote healthy long-term and sustainable development of the economy is to adjust its unreasonable economic structure. Any increased investment in the context of an accelerated slowdown should mainly flow to newly emerged and innovative industries instead of those sectors with overcapacity.

China should not panic in the face of its economic deceleration. What it should do is reduce the tax burdens on enterprises, particularly private ones, and push for reform of its income distribution regime to increase people's incomes. It should also take practical measures to break established barriers for non-governmental capital to invest in specific fields and create a good institutional environment for enterprises to survive.