Chinese Economy May be Overheating

Data released in the last few weeks in China may be indicating that the third largest economy in the world is beyond recovery period and may be close to overheating. Yet, the Chinese government is still far from acknowledging that fact and focusing on slowing down the property prices instead of initiating monetary policy tightening.

Indeed, after an unprecedented 8.5% growth in 2009, the Chinese economy grew even faster in first three months of 2010, stimulated by loose monetary policy and huge fiscal stimulus. And although this 11.9% expansion may not look impressive, because it is compared to the first quarter of 2009 when the growth reached 6.2%, other statistics point to much faster acceleration. For example, newly published quarterly GDP data shows seasonally adjusted rate of 12.2% relative to the previous quarter, when economy recorded 11.3% annualized growth. Adding to that the fact that stimulus has been gradually withdrawal by the government and it is clear that China is expanding above its potential growth rate which may lead to pick up in inflationary pressure.

Looking further, there are also signs that China's demand growth is outpacing growth in supply prompted by easy access to money. For example, People's Bank of China recently revealed that in March the output gap reached more than 3%, the highest level since 1998 and the seventh straight month of increase. Positive output gap indicates that factories are running out to comply with high demand which in turn is likely to push prices even higher. Indeed, after 18.1% growth in March, industrial production rose 17.8% in April. Also, retail sales is continuously beating all estimates: in April it increased 18.5%.

Anna Fedec,
5/11/2010 8:24:49 PM