Chinese Premier Wen Jiabao announced China’s intention to cut investment growth this year, a goal that could have a negative impact on the whole economy, starting from tax collection to loan growth to personal incomes and imports.

Overinvestment in buildings, factories, infrastructure and other fixed assets has turned out to be the main problem of China’s fast-growing economy. In his annual work report to the national legislature released this weekend, Mr. Wen said the government is aiming at achieving 16% fixed-asset growth, still double the targeted growth rate for the overall economy but significantly lower compared with last year’s fixed-asset growth of 26%.

The subsequent effect could be enormous since fixed-asset investment amounted to half of China’s $1.65 trillion economic output last year. Mr. Wen predicted overall trade growth would fall by more than half partially because of a decline in imports and a slowdown in factory expansion. Urban wage-earners should expect paychecks to grow 6% this year, compared with 7.7% in 2004, he said.

The sharp pullback in investment shows that the Chinese government remains very concerned about the possibility of the rapidly growing economy getting out of control and that Beijing is making serious steps to prevent it. Last year Beijing took drastic measures including a freeze on some bank lending and a ban on certain land sales in order to restrict the investment boom. Nevertheless, economic growth in 2004 was slightly higher compared with that in 2003, partially because local governments, always keen for high growth, lessened controls.

As far as the yuan is concerned, Mr. Wen didn’t disclose any new policies on the national currency in his report to the Communist Party-controlled National People’s Congress on Saturday. The U.S. and other trading partners have prompted Beijing to allow the yuan to strengthen against other currencies, a move it has opposed. But even a small upward revaluation of the Chinese currency could assist Beijing in improving the market situation since it will make exports more expensive and lower an inflow of speculative investment that has overwhelmed China in expectation of such a revaluation. Some Chinese economists support the idea of revaluation saying that the proper time has come.

With the expected slowdown in the economy, Beijing said it doesn’t trust 2004 bumper year for tax collection to continue, and will allow funds to narrow the budget deficit to 2% of GDP this year rather than push forward tax cuts or other relief measures, according to the Wall Street Journal.

But the government isn’t reducing the amount of state spending but is redirecting the flow of funds to spread the benefits of growth more widely. Mr. Wen in his report announced increases in spending to help the unemployed, the poor and farmers.

This shifting of resources underlines the government’s concern that widening income inequalities are the source of social discontent, a problem Mr. Wen emphasized in his speech. But economists say that China’s economy would benefit from this step in the future.