China: Overheating Concerns

Economists concern that a sharp slowdown in the Mainland would endanger the already fragile economic recovery of North America, Europe and even the rest of Asia!

China, the world’s second largest economy, has been the primary engine driving much of the global economy especially in the post global financial crisis. However, the economy is now struggling to reduce runaway lending, combat speculative asset bubbles and curb rising consumer goods prices.

To control the rip-roaring economic growth, the government initiated measures like rate hikes, increased bank reserves and resorted to price controls on stable foods, yet economic growth continues to accelerate, rising 9.8% in the fourth quarter of 2010, up from 9.6% in the previous three-month period, fueling speculation that the central bank will have to do more to cool the economy and ease inflationary pressures. Although inflation dropped in December 2010 to 4.6% from the 28 month high of 5.1%, but food prices remain persistently high, after having jumped by nearly 10% in 2010. Rising food prices could pose a danger to the economy if left unchecked, as swelling food prices could further hurt the purchasing power of its citizens. Already rising food prices prompted a series of minimum wage hikes across the country.

China’s monetary authorities have been trying to prevent the economy from overheating, the government, however, has been reluctant to significantly increase lending rates or the value of its currency, Yuan due to concerns about the weak global economy. Being the engine of the global economy over the last two years, China’s violent economic cycle could be highly destabilizing the fragile world economy. On the global stock market front, uncertainty about the future of the Chinese economy triggered a sharp sell-off in global equity and commodity markets.

Why China Matters!

In the new world economic order, the health of the Chinese economy matters a lot as it is currently the third top buyer of US exports, lagging only behind neighbors Canada and Mexico. Moreover, with the world's largest population of 1.3 billion people and a rapidly growing middle class who are buying everything from groceries to cars, it is also the fastest growing export market in the world and also has high stakes in the US economy, as the country's largest lender. In words of Erin Ennis, Vice President of the US-China Business Council, “The biggest lure of China is the elusive goal of one billion consumers.  Many business owners think, 'if I could sell just one product to every person in China, think how well my business would do.”  In economic sense, more US exports to China mean more jobs at home (the US). This is the reason why President Obama is pushing for the US to double its exports in the next five years.

Despite some disbelief about China, the Dragon is developing into this economic powerhouse and coming through the recession as strong as it did in the past and in the recent global crisis. So believe that the awakening China is for real this time too.

Tags: Overheating, Economic Powerhouse, Recession, Slowdown, World’s Second Largest Economy.

N Janardhan Rao, Senior Economist.