Articles: http://www.economist.com/businessfinance/displayStory.cfm?story_id=15331229
This article discusses whether the China's economy is overheating. Figures published in January shows that China's real GDP grew by 10.7% year on year in the fourth quarter, industrial production jumped by 18.5% in the year to December, and retail sales increased by 17.5%. Government subsidies and tax cuts on purchases raised these index and the rise in retail sales last year was the biggest for over two decades.
Although least year economists worried about deflation and unemployment problem in the following year, now they begin to think that China's economy is overheating and inflation looms to be a problem. Actually the 12-month rate of consumer-price inflation rose to 1.9% in December, an abrupt change from July when prices were 1.8% lower than a year before.
Some believes that the recent high inflation rate is caused by the high prices of fresh food in temporary bad weather, yet economists from Goldman Sachs points out that China's economy is starting to exceed its speed limit. Some provinces report electricity shortages, and stocks of coal are low. The labour market is also tightening, forcing firms to pay higher wages.
The extraodinaroly rapid growth in money and credit may well turn to high inflation rate and Chinese government has no reason to keep the yuan stable against the dollar now.
i think that in most situations like this it would be very wise for china to consider some sort of contractionary monetary of fiscal policy to slow down their growth. If they don't enact a policy to slow down their economy they will start to see several problems that could hurt them in the long run.
ReplyDeleteChina is putting policy into place to slow growth. The article mentioned one; that the central bank is raising reserve requirements. The result of this is less lending, which obviously then leads to slowing growth of firms because of the availability of loanable funds to buy land/capital. Even on top of that, most of this "property boom" in China is being financed by saving, not credit (like in the US), a saving bubble is far better than a credit bubble. They are also heavily regulating mortgages by restricting foreign capital and imposing high taxes on quick sells. It is tough to impose immediate and harsh policies after what the world economy has been experiencing over the last 18 months, so China is putting policy in place slowly to ensure that there aren't any violent reactions in their own economy.
ReplyDeleteIn China, GDP is calculated in a mixed approach.Unlike GDP is calculated in US by income taxes, The mixed approach is that the value added in some sectors such as agreiculture, manufacturing etc. is calculated by production approach, and other sectors such as service sectors is calculated by income approach while estimating GDP by industry. And there are a lot of business underground, so the GDP estimation might not be accurate.
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