Thursday, August 26

Chinese Economy - overheated

This is an interesting article from Forbes...

Excerpts:

China has often underestimated its actual growth rate and, as a result, the degree by which its actual growth exceeded its potential growth in the past few years, as well as all the problems associated with overheating. Such underestimation often compromised the Chinese government’s efforts at timely and effective macro-control. Given the revised data, the Chinese economy experienced full-blown overheating – not the so-called “slight speeding” or “partial overheating” – right before the global financial crisis. Of course, double-digit inflation was absent this time because China had permanently switched from shortage economy to surplus economy around the mid-1990s. ....

...It was an unprecedented phenomenon that China’s actual growth rate exceeded its potential growth rate for six consecutive years of 2003-2008. After years of overheating, the Chinese economy was destined to undergo a downward adjustment process even if without the impact of the global financial crisis. Admittedly, the recent crisis’ global reach did make it harder for China to avoid a hard landing in the adjustment process. In 2009, China’s actual growth rate eventually subsided below the potential growth rate, and the deceleration rate of the economy also decreased to 10.8%, down from 29.2% in 2008. ...

...Since China plays a prominent role in the global economy, a second dip of the Chinese economy would mean a second dip of the world. Therefore, a “slow” U-shaped recovery of the Chinese economy should be interpreted as a positive sign indicating that China is moving along the right path....

..If China fails to launch a new round of institutional reforms to extricate itself – as soon as possible – from the trap of extensive development, and if it continues to rely on excessive capital deepening and borrowing from the future to keep the actual growth rate above the potential rate, it will soon find itself in the throes of a catastrophe similar to the one experienced by South Korea during the Asian financial crisis.....

Please follow the link below for the complete article:
Forbes India - The World Needs a Soft Landing of the Chinese Economy

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