The Chinese Economic Debate Is China Overheating
When a bubble economy is thriving, people are prone to believe that it willlast forever (Ignatius, 2004). This general feeling existed in Japan in the1980s and in America in the late '90s. Today, many people believe that thisis what is happening in China -- the "miracle economy," where returns havebeen so consistently high that people are starting view investing in ChinaOn any of the capital's boulevards, billboards advertise "Season's Park," abrand-new fancy apartment complex that bills itself as "Home of the Tycoons(Ignatius, 2004)." The entrance is features images of the Statue of Libertyand the Arc de Triomphe, and there's a telephone "hot line" so newlywealthy Chinese residents can rush to buy property there.The new Chinese leadership understands the danger of overheating, and isnow taking slow yet steady steps to slow the economy from last year's 9.1percent growth rate. However, like Alan Greenspan's 1996 warning about"irrational exuberance" on Wall Street, the Chinese government's warningshave had little effect. During the first quarter of 2004, economic growth"Some people think that China's economy is already overheated;
Investment is increasing, but wages have not pickedup. As a result, economists have warned investors thatthe Chinese economy may be overheating. Therefore, even if China's economywere to deflate in 2009, it would still be ahead of the game. These figures show that arisk exists that factories and properties currently being built, will beunder-utilized even as overall demand increases. Basically, it couldcause a recession. Legally, the interest rate is decided by the government and cannotbe adjusted freely. Similar actions occurred on Wall Street, where the market dropped after theinterview. However, it does not have manyoptions. ConclusionAccording to economist and 2002 Nobel price winner Joseph Stiglitz, Chinadoes not seem to be overheating (China InfoCenter, 2004). This presents the threat ofthe economy overheating and the risk that companies, fuelled by the mirageof growth and cheap current interest rates, create capacities exceedingeffective demand. However, under the current situation, the central bank has publicly statedthat it believes that its present measures can already control money supplyincrease appropriately, so there is little possibility that the interestrate will increase. This has led to an inflow of money into the Chinese bankingand financial system, which has been used in turn to finance investment andproperty speculation. Song says, "the Chinese economy is readyto get out of the mud of deflation, and a macroeconomic recovery is insight.
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